Rubicon Organics Inc. (ROMJ) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Rubicon Organics' Third Quarter 2025 Earnings Call for the 3 and 9 months ended September 30, 2025. As a reminder, this call is being recorded. [Operator Instructions] Please refer to Slide 2 for our cautionary regarding forward-looking statements and non-GAAP measures. Today's presenters are Margaret Brodie, CEO; and Glen Ibbott, CFO. I will now turn the call over to Margaret.

Thank you, and good morning, everyone. I'm pleased to share our Q3 2025 performance and an update on our strategic plans as Canada's #1 premium licensed producer. Glen will then take you through our financial results. In Q3, we achieved net revenue of $15.6 million, up 16% year-over-year, marking another record quarter. It's important to note that our growth has come despite our capacity constraints, which we are planning to partially address with our capacity from the Cascadia facility in 2026. We delivered adjusted EBITDA of $1.7 million, our sixth consecutive quarter of positive adjusted EBITDA and delivered net income of $2.8 million. We expanded our vape portfolio with the launch into the All-in-One category. Following the close of the quarter, we also finalized licensing for our Cascadia facility, formerly known as Hope, with first crops planted October '25 and operations now underway. And we sent a drop shipment to Australia under the 1964 brand, our first international branded shipment and our first time shipping to the country, and we secured additional debt of $4 million. Rubicon continues to outperform the market, growing faster than total market and in 3 key premium categories. In premium flower and pre-rolls, we've grown our market share to 6.2%, up from 5.7%. In premium vapes, we've made a big leap, now holding 13.2% of the national market compared to 0 just a year ago. This rapid market share capture reflects the power of and demand for our leading premium brands. And Wildflower remains a standout, the #2 topical brand in Canada with over 27% share. Just a quick note on how we're reporting vape performance going forward. Hifyre, the industry data source that pulls the data has changed its categorization and no longer includes our live resin vapes under the live resin category. To keep things consistent and better reflect the underlying performance, we decided to report under the broader premium vapes category going forward. Our 1964 brand, the engine of our business-led growth driven by pre-rolls and vapes. Simply Bare saw modest growth but remains an important and profitable part of our portfolio, and Wildflower maintained its leadership with Canada's top-selling topical SKU. We continue to launch new products that reflect our genetics leadership and premium positioning. BC Organic Black Zoap and Apples and Bananas launched under Simply Bare and 1964, respectively. Notably, Apples and Bananas delivered our highest ever terpenes on record in company history of over 5.8%, demonstrating our continued increase in focus on quality, which we believe sets our brands apart from the competition. After our initial All-in-One launch in July, we delivered a second cultivar later in Q3 and expect 2 additional SKUs in market by year-end. This launch strategy reflects the strong consumer demand for our leading premium vape portfolio. Before I hand things over, I want to take a minute to thank Glen for his impact already here -- made here at Rubicon. His leadership has definitely been felt across the business, and I'd like to congratulate him and welcome on board with his permanent appointment as our CFO and Corporate Secretary. And now I'd like to pass the call along to Glen.

Thank you, Margaret. Good morning, everyone. In Q3, we had another solid quarter. Net revenue was $15.6 million, a 16% increase year-over-year despite our current biomass capacity constraints. Gross profit before fair value adjustments was $5.8 million, up 32% from the same period last year. And our gross margin was 33% compared to 32% in Q3 2024. Adjusted EBITDA was $1.7 million, down $200,000 from Q3 of last year, which was expected as we made some targeted investments in SG&A to support future revenue growth. Now to explore in a bit more depth the drivers of our continued growth. 1964 remains the company's primary growth engine, delivering strong performance across the key segments of pre-rolls, vapes and flower. The pre-roll category continues to show notable momentum with revenue up more than 80% over the same quarter last year, and 1964 vapes were up more than 20% over the same period. The brand also posted modest gains in dried flower, even though current limited biomass availability has constrained Rubicon from fulfilling what we believe is significant unmet demand for 1964 flower. We expect the Cascadia facility to partially alleviate this constraint in the second half of 2026. Simply Bare, our leading ultra-premium brand, saw a small decline of just over $100,000 compared to Q3 of last year as dried flower was down modestly, but was partially offset by gains in capsules. Wildflower, although smaller in revenue than Simply Bare and 1964, carries stronger-than-average gross margins. I'm pleased that the brand was up strongly in Q3 2025 compared to last year. 60-gram sticks were up over 30%, remaining Canada's top-selling SKU in the segment according to Hifyre and Wildflower gummies were up over 80% from the same quarter in 2024. Homestead revenues remained low, which reflects the strong performance from our operations team in delivering high-quality premium product for our 1964 and Simply Bare brands. As you may know, Homestead serves as an outlet for biomass that does not meet the premium standards of our flagship brands, but it still offers strong quality at competitive prices. Overall, gross profit before fair value adjustments was $5.3 million in Q3 and $14.2 million year-to-date, up from $4.4 million and $10.2 million in the prior year comparative periods. This translates to a gross margin of 34% in Q3 and 33% year-to-date compared to 32% and 30% in comparative periods last year. Margin improvement was mainly driven by higher volume throughput and efficiency gains. We implemented our pre-roll automation technology in Q3, which is expected to reduce labor costs and increase annual gross profits by approximately $1 million based on current volumes. With pre-roll automation complete, we are now evaluating a number of additional operational efficiency projects that we should benefit our overall margin profile over time. We have also seen our ongoing focus on increasing cultivation yield while never compromising on our quality standards, but it's starting to show results. Our Q3 2025 yields were up more than 10% over earlier in the year. Clearly, the P&L and cash flow multiplier effect of attaining additional high-quality cannabis without significant incremental cost has a meaningful positive impact on margins and on our ability to get more growth from existing assets. We believe we have room to continue to improve the yield at Pacifica. SG&A expenses in Q3 2025 increased $1.3 million over the prior year as we invested in targeted marketing initiatives to drive brand growth and brought on key talent to position the business for near-term expansion. We also saw increases in Health Canada fees, licensing and insurance costs as revenues continue to increase and we brought on the new Cascadia facility. As a reminder, in addition to incurring $4.2 million in excise taxes in Q3, we, as is the case for all licensed producers, also incur the Health Canada regulatory fee, which is calculated at 2.3% of net revenue and naturally rises as our revenue grows. Adjusted EBITDA for Q3 2025 was $1.7 million compared to $2 million in the prior year. Importantly, this marks our sixth consecutive quarter of positive adjusted EBITDA, underscoring the resilience of our core business and our ability to deliver profitability while continuing to invest in long-term growth initiatives. Turning to cash flow and financial health. Despite investing in building inventory for vape launches this fall, we still generated $0.5 million in cash from operating activities in the third quarter as compared to $900,000 in Q3 2024. That 6 of the last 8 quarters delivered positive operating cash flow. We closed the quarter with $6.9 million in cash and a strong working capital position of $24.1 million. As noted in our press release earlier this week, we have secured additional debt financing totaling $4 million from an existing lending partner at similar terms to our current term debt. This strengthens our liquidity and provides us flexibility to support growth initiatives and strategic priorities. In short, we are delivering strong financial performance and growth within our existing footprint as we continue to increase revenue and margins and generate positive adjusted EBITDA and operating cash flow. By leveraging our high-quality efficient cannabis production, exceptionally strong brands and excellent talent, we have delivered this financial performance while also investing strategically for the expected revenue inflection next year as we bring on more capacity. We look forward to the hard but rewarding work of continuing to grow revenue and expand margins through scale and efficiencies, all while maintaining a robust financial position. Now back to Margaret.

Thanks, Glen. We have recently renamed our facilities to better reflect our regional presence. We now operate Pacifica located in Delta, BC and next to the Pacific Ocean and Cascadia based in Hope, BC at the beginning of the Cascade Mountains. I'd like to share an update on Cascadia. In early October, we received full licensing for cultivation, processing and storage at the site. While the licensing process drifted into the beginning of the fourth quarter, we are now moving forward operationally and the slight delay gave us valuable time to refine our operational plan and ensure the facility was fully prepared. We've now planted our first batch of crops at Cascadia. As these are our initial crops from this site, we're approaching quality expectations with caution given our high standards. We plan to sell this first batch through Homestead, while our expert team continues to optimize the growth strategy. We anticipate reaching our usual high-quality standards by the midpoint in '26, and we will be -- we expect to be able to deliver quality for our 1964 brand at that point. We expect to have the impact of the Cascadia operating costs of around $1.5 million per quarter with revenue upside beginning in the second half. We are also adding some capabilities in other parts of our business in order to be ready for a larger top line and more throughput. In 2025, we expect to incur $1.5 million in pre-revenue operating costs at the Cascadia facility. Additionally, we plan to invest around $1.6 million in capital expenditures at the site to support infrastructure, equipment and operational readiness, and the CapEx plan remains on budget. As at November 12, the significant majority of the work is complete. Cascadia is designed for continuous production with 9 individual clusters of grow rooms, each operating on a staggered weekly planting cycle with cluster sizes varying from 1,600 square feet to 3,500 square feet. This approach supports consistent market supply and aligns with our demand planning. We'll be continuously learning and adapting our cultivation strategy to drive quality improvements with each cycle. This expansion increases our annual production capacity by 40%, and it supports several key strategic priorities. Firstly, unlocking international opportunities. With greater scale, we're now better positioned to pursue select international markets, many of which are showing a gap in premium and super-premium products. And secondly, strengthening our top priority Canada. The additional capacity allows us to better meet domestic demand, particularly for our high-performing capacity-constrained brands. I get asked a lot about our ability to sell incremental premium flower from Cascadia, and I would like to comment on 2 areas that give us confidence on this matter. Well, recently, there is net new production coming online in Canada for the first time in years and from other competitive international markets, namely Thailand and Colombia. But what we see is that, this supply is coming into the mainstream and value segments and not premium, and we're not seeing net new premium facilities turning on. We believe that this creates unique and valuable opportunity for us in the coming years. Secondly, in October, a 5-week strike by BC's provincial distributor halted sales in our second largest market. We quickly redirected branded products to other provinces, showcasing the strength of our supply chain and the strong demand for our brands. This disruption confirms the unmet demand and reinforces my commitment to expanding internal capacity to capture that opportunity. The strike has now ended with an agreement expected to be ratified very shortly. We have now resumed sales in BC and are continuing to build momentum across Canada. Throughout 2025, we expect to secure up to 2,000 kilos of incremental biomass and strengthen our manufacturing capabilities through strategic partnerships with co-manufacturers and contract growers. These initiatives reflect our commitment to meeting the growing demand for premium products while maintaining the highest quality standards. Looking ahead, the addition of Cascadia will unlock new opportunities to expand our product portfolio. This facility positions us to explore new segments and format sizes, further diversifying our portfolio of premium cannabis products. On the international front, we have successfully completed test shipments to 3 different markets, Poland, Australia and the U.K. These initial exports were designed as learning experiences rather than margin-driven transactions, forming the foundation of our crawl, walk, win strategy, the same disciplined approach we've taken in the past that were reason for our success in categories such as topicals, edibles and vapes. These shipments are enabling us to build operational knowledge, navigate regulatory pathways and establish relationships that support long-term success in international markets. Finally, our additional $4 million in debt secured in the form of a $3 million capital loan and $1 million line of credit will enable us to support all the growth opportunities as mentioned prior. 2025 remains a transformational year for Rubicon Organics. A recap of our priorities: Secure additional premium supply via Cascadia and third-party agreements; increase capacity through 2,000 kilos of wholesale biomass; strengthen domestic market leadership; drive genetic innovation with new cultivars; test international markets ahead of broader expansion in 2026; and continue expansion in the vape segment. We continue to forecast growth in net revenue and adjusted EBITDA, excluding Cascadia start-up costs as we close out the year. We'd now like to open up the line for analyst questions. Operator, please open the line.

[Operator Instructions] And your first question is from Neal Gilmer from Haywood Securities.

Margaret, maybe I want to start with some of your prepared remarks on the Cascadia facility and make sure I understood a few things there. First of all, you said you're going to invest $1.6 million. I believe you said by -- as of yesterday, most of that has been incurred. So it's basically now the focus, you don't have any more sort of CapEx upgrades to do to the facility. It's just on building or planting out all the rooms. When do you expect to sort of be running at full capacity? I understand you commented that your standards as far as quality said, I think, around mid-'26. But as you ramp that up, when do you think that we're sort of at that sort of full capacity run rate and you'll get that sort of benefit from the 40% increased capacity through this acquisition?

Thanks, Neal. We have largely completed the significant 2025 CapEx. I'm sure as we go through, we're going to find things where we can optimize over the course of the next 18 months. So very happy with where we're at today in terms of where the facility is and running. We -- as operators, we are planting crops in batches so that they come down on a commercial scale and everything doesn't come down at once. So we wouldn't go in and -- I don't think it would be wise to plant the whole facility at once, so everything came down at once. So the first batch is planted. There are sort of a series of clusters of rooms. What we expect to do is -- I would expect in the first quarter, we're fully planted. Initially, we thought by the end of the year. I think it's -- by the way, the sort of the weekly and 2 weekly cycles go, it's probably in January, we're fully planted. And we're expecting our second harvest to meet our quality standards. So we do expect to have some revenue coming out of Cascadia in the first half. We're making sure that we are holding the quality standard in terms of it going into our product now. I would say from a comment perspective, the pressure I put on the team is the very first batch out of Pacifica launched Simply Bare. So, obviously, I'd love to beat that, but I'm recognizing we're in a brand-new facility that we haven't operated in before. So the midpoint next year, when we expect 1964 quality, we do expect to have some -- that we'll be able to monetize the production between now and then. But whether it goes in Homestead or there are small amounts that do meet our quality standard, it's hard for us to estimate today given that it's just been planted.

Yes, totally understand. Maybe I guess sort of the follow-up on that is that, now that it's licensed and came online in October here, what sort of -- or how should investors be considering or thinking about your gross margin over the next couple of quarters? I'm assuming it's going to have a short-term pressure on the margins given you added new facilities, it's not operating at full capacity. Is that the right way to think about it that we should see a little bit of a dip in gross margins for the next couple of quarters until it's ramped up?

Yes. And I'll answer the first part of this, and then I'll ask Glen to step in. What I would say is, we expense our production costs as they're incurred. So you're going to see an incremental amount in there and almost significantly all of the costs from Cascadia go into that line because it's just a production facility and everything is packaged in our -- in Pacifica. Glen, maybe you want to comment a little bit further on our margin expectations.

Yes, Neal, it's a great question. We've said in past quarters that we're going to call out the amount of the Cascadia production costs that we're incurring, particularly pre-revenue. So we'll make sure that everybody is aware of what the run rate costs are at Cascadia. I do expect pressure on the margins as reported under IFRS for the first couple of quarters until we get the volume and the commercial production up. And I will say, and we'll talk about this a little bit later, I'm sure we'll get a question on where we expect margins to go. But I think in the short-term, as Cascadia ramps up and we start to put more of that production into some of the unfulfilled demand, particularly in larger format bags, 1964 flower, pre-rolls, those necessarily come with somewhat slighter gross margins. It's incremental dollars. I love it, but it still will put some pressure on the gross margin percentage. So that's my expectation over the ramp-up period of next year is we'll have some pressure on the margins from exactly these things, the ramp-up and the fulfilling larger formats. But we do have a number of initiatives to push back on that and push margins up.

Great. Last one for me. Again, from your prepared remarks, Margaret, you commented on the strike in BC. So you commented that you just diverted your inventory or product into the other provinces, too. I'm trying to figure out how a way to say this. So you feel you weren't like overly impacted in the quarter from the strike or you feel like revenues would have been higher had you not had to take that strategy and deal with the fact that the strike was going on?

Yes. Look, we look at this commercially, which was we want to be there for our retail partners here in British Columbia as and when they open back up. At the same time, we have a product that is aging. So we did a slow release. We didn't know when the strike was going to end. So we did a very slow release into other markets. What it showed us, and it provided a proof point that there is significant demand, as we've been saying. I believe that we're going to -- will largely make up the gap from BC with the initial orders back in and with the work that's being done and the demand that we had in other parts of the country. So we're very pleased with it. We did want to have product available. Like if we took all of the stuff that's in highest demand and pushed it to the other markets, we wouldn't have any product for BC, and we wanted to be ready for when to start paying back on. So it was a bit of a balancing act, I would say. I think we rolled the line in the right way, and we're very pleased with what's happened in terms of the demand elsewhere as that proof point.

Your next question is from Pablo Zuanic from Zuanic & Associates.

Look, you've been very clear about explaining the decline in flower sales because of lack of capacity. But I'm just trying to understand how much is it really demand-driven and how much supply-driven, right? Like according to Hifyre, and I understand it's not perfect data, your flower sales and your pre-roll sales in the last 2 quarters up about 40% year-on-year. On the other hand, your flower sales down in the low-teens in the last 2 quarters year-on-year. So -- but is there some demand element there or some competition in the premium flower segment that's having an impact? Or is it you allocating more biomass to pre-rolls because that's more profitable than premium flower right now? Just trying to distinguish between -- is it solely a supply issue? Or is there some demand issue that we should also factor here?

Great question. From our side, we're not seeing a demand issue. I would say we're seeing a shift in, and I've spoken about it publicly, the rise of convenience and the trust that's actually going into products at this stage. Consumers are shifting to pre-roll or being asked for pre-roll. And when we have a certain amount of supply, we want to make sure where the consumer is and where the consumer that wants our brands. That's probably the largest shift. We've really been wanting to answer that, and we've seen incredible demand for pre-rolls, as you've just noted, the 40% increase. We're also extremely, extremely happy with where our flower is going and the quality that we're getting out of it. And we believe that we're only getting better from here. One of the pieces that people don't understand externally about our business, we try to talk about it is that, we grade everything through a panel before it goes out. The highest ever grading we've ever had out of our panel is, I believe, 82% on 100%, which shows that we believe we've got a lot better. And over the last year, the panel grades have gone up from sort of high-60s to low-70s, mid-70s on our products that are going out. What we're seeing is even higher terpenes, higher yield, higher results overall. So we continue to believe that we're positioned very, very well. The consumer is shifting their patterns quite a bit. And one of the things that the data is also not showing is that, the rise of the very large format packs, which is actually shifting the numbers as well. So consumers are buying less 3.5 grams and moving more to the 28 grams. And when you're supply constrained, you want to sell the higher-margin item, which is a 3.5-gram versus the 28-gram. So we're looking for Cascadia to come and answer that question because, in particular, for the 1964 28-gram bag, we have very high demand, and it will be a balancing act of managing our gross margin to optimize that, but also fulfilling consumer demand.

That's good color. Just -- go ahead, sorry. Just on pre-rolls, I think in the past, you've said that you're not competing in the infused segment, right? So, obviously, very impressive growth given that most of your growth has been in infused until recently. Can you remind us why you're not competing in infused? And is there a plan to enter that segment?

Great question. We actually are in infused, but it's not a core focus of our business. The reason is, when we go to market, we want to go with something that is best to market. So what you'll find in market is a Simply Bare infused live resin product. It's a very heavy hitting and relatively expensive premium connoisseur product. Where the largest segment of infused is relatively low-priced high, high, high THC botanical terpenes added volume product. We don't see as much demand from the premium side of the market in that. And where we do, we are answering that. But we're not -- we believe that a premium product is not necessarily -- we don't need to add botanical flavors to our weed to have it be fabulous. And we're very proud of that. So I think that's a bit of a race to the bottom in terms of consumers walking in and asking for highest THC lowest price. We're looking for experience. So it's not a category that, yes, we've put some energy into it. We have some beautiful products there that speak to the premium experience, but there's a bit of a different consumer that's looking at that.

And one last one. Look again...

But I have to say, Pablo, I am frustrated. I would love to do better there.

And one last one. Look, again, going back to Hifyre, the pricing for Simply Bare and 1964, at least based on the data, it's looking very similar, right? And I'm just wondering, is that just the nature of the market? Are the brands losing that differentiation? Is that something that you need to manage better? Is that a concern or not an issue because they are just different brands targeting maybe different segments, and it's not about the price differentiation between the 2 brands?

Great question. We -- from our experience, they are not meant to be priced similarly. I think some of that is happening with retailers in store and certainly not happening on our end. What we do find is, some people increasing price on some of our products to take more margin because of the rate of sale on them. But no, we've got the brands quite pulled apart in terms of the wholesale pricing into market and where their sort of MSRP would be. An 1/8 of Simply Bare should be around $45 and an 1/8 of 1964 should be around $35. So to us, there's quite a big differentiation. If you're looking at that on a blended ratio, perhaps it's from how retail data is being scraped. I can't really answer why that's happening other than I have seen that in the odd circumstance anecdotally in store, but that's not where they're positioned.

Your next question is from Nicholas Cortellucci from Atrium.

Margaret, congrats on the quarter and also congrats on the role, Glen. So first question here, I wanted to ask you guys about do you have any additional commentary on Australia with the test and learn strategy and how that strategy looks going forward?

Great question. As we've said many times before, we're brand builders, not looking to sell hockey bags of weed internationally. And we believe that there is a long way to go with cannabis in the international markets and what's going to happen with brand. So what we've used the last -- these shipments internationally to do is to learn about regulation, learn about how to export, learn about partners, meet people, et cetera, before we look at what a launch would be, which we do expect to have more information on in 2026. The launch into Australia was a really great -- it was our first very small drop, and it was a testing -- it was a test case. So it is branded with Single Estate, which is a small premium medical operator under 1964 with one of our genetics that we wanted to see consumer reaction to. It's not yet -- it's being packaged now, so we haven't actually heard those results, but very keen to see how in a newer market, people react. What we are starting to hear more and more is that, there's a very big gap that the international markets have been filled with a lot of bulk lower value and quality weed. And even the leaders of those businesses in the spring, one of them said to me, "Nah, this market is never going to go premium. They're never going to want it. We're never going to understand it," and called me 3 weeks ago and said, "Hey, can we buy all your wholesale product?" So I think the recognition that this will also move towards the CPG model with people at different levels wanting different quality supply is getting recognized.

Got it. And then shifting to the debt proceeds. How do you guys plan to utilize that? And what are the next milestones that we should expect from Cascadia?

Glen, I'm going to ask you to jump in on that one.