Ms. Margaret Brodie reports

RUBICON ORGANICS REPORTS FOURTH QUARTER AND FULL YEAR 2022 FINANCIAL RESULTS

Rubicon Organics Inc. has released its financial results for the fourth quarter and year ended Dec. 31, 2022.

"Rubicon Organics has achieved significant financial milestones in a fiercely competitive environment, delivering adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] profitability and positive cash flow from operating activities for the 2022 year. These results are a testament to the unwavering commitment of our team to quality, which is now being acknowledged by our customers. Rubicon is at an inflection point, poised for continued growth and anticipating further financial strength in 2023 as we seek to meet the market's demand for our products. Despite negative investor sentiment in the cannabis sector, I believe that the winners of the Canadian cannabis sector will emerge in 2023, and Rubicon is well positioned to be among them," said Margaret Brodie, interim chief executive officer and chief financial officer.

Q4 2022 highlights:

• Net revenue of $11-million was an increase of 61 per cent from the same period in 2021;
• Achieved adjusted EBITDA of $1.3-million;
• Achieved positive operating cash flow of $2.8-million;
• Achieved positive free cash flow of $1.9-million;
• 2.4-per-cent national market share of flower and prerolls;
• 5.4-per-cent national market share of premium flower and prerolls.

In the fourth quarter of 2022, the company earned $11-million of net revenue, an increase of $500,000, or 5 per cent, when compared with the third quarter of 2022 (Sept. 30, 2022: $10.5-million). The fourth quarter net revenue was relatively flat from the third quarter, as Rubicon had certain facility maintenance and downtime which impacted its crop yields and availability of supply in the autumn. This was offset by the positive momentum for Rubicon in the preroll category following the launch of infused prerolls under both Simply Bare Organic and 1964 Supply Co. During Q4, the company also began selling through the OCS's (Ontario Cannabis Store's) flow-through program, which has proven useful for products where Rubicon does not yet have consistent supply or demand, and in Quebec, the company benefited from additional flower and preroll listings.

Production costs in the fourth quarter 2022 decreased by $300,000, or 10 per cent, when compared with the third quarter of 2022 (three months ended Dec. 31, 2022: $2.6-million, as compared with three months ended Sept. 30, 2022: $2.9-million). Rubicon can see the efficiencies gained through process improvements in its cultivation system and cost savings as a result of completion of the BC Hydro project from September, 2022, onward.

Inventory expensed to cost of sales amounted to $3.7-million in the fourth quarter of 2022, which is an increase of $300,000, or 9 per cent, when compared with the third quarter of 2022 (Sept. 30, 2021: $3.4-million). This ratio was marginally ahead of the net revenue growth due to product mix, with a higher proportion of sales derived from concentrate products in the fourth quarter, most notably infused prerolls.

The company incurred operating expenses of $4.8-million in the fourth quarter of 2022, which is an increase of $1-million, or 26 per cent, when compared with the third quarter of 2022 (Sept. 30, 2022: $3.8-million). The increase is mainly due to non-cash share-based compensation from the issuance of deferred share units and restricted share units compared with the prior quarter. The company has also incurred additional corporate expenses relating to the professional fees, such as for the search for new board nominees, and a year-to-date true up of the bonus accrual to account for performance under the company bonus plan.

Net loss during the fourth quarter of 2022 was $3.1-million, compared with net profit in the third quarter of 2022 of $2-million. The movement was driven primarily by a quarter-over-quarter decrease to fair value adjustments to cannabis plants of $4.3-million. There has been a change in growing approach over the past year in order to increase plant density and uniformity. This has resulted in a higher number of plants, therefore decreasing the number of grams per plant, which has been reflected in the company's fair value of its cannabis inventory.

Highlights 2022:

• Record net revenue of $35.5-million (57-per-cent increase) for the year ended Dec. 31, 2022;
• Achieved adjusted EBITDA of $1.9-million for the year ended Dec. 31, 2022;
• Achieved operating cash flow of $2-million for the year ended Dec. 31, 2022;
• Achieved positive free cash flow of $2.2-million in the second half of 2022;
• Extended existing debenture for 18 months to Dec. 31, 2024;
• 2.4-per-cent national market share of flower and prerolls;
• 6.3-per-cent national market share of premium flower and prerolls.

For the year ended Dec. 31, 2022, the company reported net revenue of $35.5-million, a 57-per-cent increase compared with the prior year. For the year ended Dec. 31, 2022, adjusted EBITDA was a profit of $1.9-million, compared with a loss of $8-million in the 12 months ended Dec. 31, 2022.

Annual results of operations 2022

Net revenue

The company delivered record net revenue of $35.5-million for the year ended Dec. 31, 2022. This represents significant net revenue growth of 57 per cent, compared with the prior year. Across the year, the company doubled the number of SKUs (stock keeping units) for sale, with the launch of several new strains and product formats compared with the prior year. The sales growth was underpinned by an increase in product yield, THC (tetrahydrocannabinol) and quality from the company's Delta facility.

Revenue growth in 2022 versus the prior year was primarily driven by the expansion of 1964 Supply Co, having a full year of sales in all key markets, continued range expansion and a new hero strain with Comatose.

Simply Bare Organic delivered flat net revenue compared with prior year. The brand was particularly affected by the overall market decrease in flower prerolls, with the market shifting to infused prerolls, increased quality competition and price compression. In the second half of the year, performance improved with the launch of new strains, larger formats and an infused preroll offering.

The strike in British Columbia, the cyberattack impacting the distribution centre in Ontario and rotating strikes in SQDC (Societe Quebecoise du Cannabis) stores in August, 2022, had an impact on the net revenue achieved in the third quarter of 2022, given that the orders were either halted for weeks or significantly slowed down in both B.C. and Ontario, but we are unable to quantify the impact of these events.

Throughout 2022, revenue growth continued across all our key markets (Alberta, British Columbia, Ontario and Quebec) which together make up 97 per cent of Rubicon's sales in the year Dec. 31, 2022 (Dec. 31, 2021: 94 per cent).

Production costs

For the year ended Dec. 31, 2022, production costs increased by $1.3-million (14 per cent) compared with the prior year.

Under the company's accounting policy, production costs are expensed as incurred. Production costs consist of the direct and indirect costs incurred to grow cannabis plants to the point of harvest. They include labour-related costs, cultivation materials and consumables, utilities, facility costs, certain overheads and production-related depreciation. This methodology means that unless product is produced and sold during the period, the production costs associated with inventory held at period end are expensed prior to revenue being derived.

The increase in production costs is related to an increase in plant density, plant handling techniques applied and increased overall yield of cannabis crops, meaning additional labour is required during the cultivation cycle and at harvest. In addition, there has been a notable increase in the costs of fertilizer and other input materials due to inflation, as well as the need to use additional inputs due to larger crop sizes and an increased number of plants on hand. The additional cultivation labour, plant density and plant handling techniques have directly related to increased quality and yield from the Delta facility.

From September, 2022, the company has started to recognize savings with the completion of the B.C. Hydro project.

Inventory expensed to cost of sales

For the year ended Dec. 31, 2022, inventory expensed to cost of sales increased by $2.5-million (26 per cent) compared with the prior year.

After cannabis is harvested, the remaining costs incurred in drying, processing and packaging are capitalized to inventory, and expensed once the finished good is sold. The ratio of inventory expensed to cost of sales was 34 per cent of net revenue for the year ended Dec. 31, 2022 (Dec. 31, 2021: 42 per cent). This ratio is directly impacted by throughput from the facility, meaning that overheads are spread over a larger number of units and, given the increase in production, this has positively impacted the ratio. In 2022, the company has also benefited from an improved brand and product mix with a larger share of its sales coming from the company's premium brands, Simply Bare Organic and 1964 Supply Co., and less of the brand, Homestead Cannabis Supply, relative to 2021.

Given the high inflationary environment in which the company is operating in 2022, management continues to monitor these costs closely and identify cost savings initiatives.

Gross profit and loss from operations

For the year ended Dec. 31, 2022, growing net revenue and production efficiencies combined for an increase to gross profit of $12.3-million compared with the prior year. Despite a significant increase in net revenues of 57 per cent, operating expenses remained relatively stable with an increase of $1.5-million (10 per cent) for the year ended Dec. 31, 2022, as the company began to see the results of operating leverage.

For the year ended Dec. 31, 2022, the company's loss from operations has significantly decreased to $2.6-million from $13.3-million in the prior year.

Rubicon Organics achieved adjusted EBITDA profitability of $1.9-million and positive operating cash flow of $2-million for the year ended Dec. 31, 2022. The company also achieved a free cash flow of $2.2-million in the second half of 2022.

Reviewing 2022's key priorities

Rubicon Organics defined a three-pillar strategy for 2022, focused on yield and quality, improving product mix to optimize margin, and investigating the international market:

Optimize yield and quality -- In 2022, the company completed facility upgrades, invested in process improvements, and continued to identify opportunities for cost and quality efficiencies. Two significant facility upgrades occurred with the installation of new dehumidifier units and completion of the B.C. Hydro grid connection. From January until August Rubicon saw an increase in both quality and yield of cannabis produced, but in the autumn, with certain facility maintenance and seasonal growing conditions, Rubicon had a relative plateau in production. In 2022, the company has now achieved repeated crops over its nameplate capacity of 11,000 kilograms and seen an increase in the company's average THC per crop, with certain strains as high as 29 per cent THC. Rubicon believes that its quality step-change was experienced by the consumers beginning in April, 2022, leading to the improved rate of sale of its products and increased demand.

Premiumization -- The second pillar was to implement Rubicon's commercial strategies within the Canadian domestic market to maximize the gross profit for each unit produced from the company's Delta facility. With the company's approach, the provincial distributors and Rubicon's consumers have access to a greater range of product formats and strain varieties. During 2022, Rubicon's strategy has proven successful, as evidenced by Rubicon achieving 6.3 per cent market share of the premium flower and preroll market. In 2022, there was noticeable increase in competition with the rise of the craft producers and the company believes that this competition led to the superpremium brand Simply Bare Organic experiencing a relatively flat year on revenues, despite increase in units sold. In contrast, 1964 Supply Co. had a tremendous positive groundswell in the market, in particular from summer 2022 and with the success of the Comatose strain.

Rubicon continues to expect the premium market to outpace the growth of the total market in Canada, in line with the performance in established markets such as Colorado and California. While the premium market has grown, there have been many new entrants from the smaller craft and microcultivator licensed producers, which have been successful in gaining share over all. Despite this increase in competition, the company believes that Rubicon is well positioned to take advantage of the rise of craft momentum as consumer preferences shift from a focus on THC to the importance of terpenes to their experience.

International -- At the beginning of 2022, Rubicon set its third pillar to open the routes to market for the company's products internationally. However, there has been significant price compression in the international markets, and Rubicon Organics currently has domestic demand in excess of the volume available from its Delta facility, thus Rubicon is prioritizing the domestic sale of the company's cannabis to continue to develop its Canadian brands which should deliver more consistent profitability. While Rubicon believes that there will be opportunities in the international markets, it has decided to continue to focus on the Canadian market in the short-term and thus, for the time being, the company will not continue to pursue its EU-GMP (European Union good manufacturing practice) certificate or maintain other certifications required solely for international export. Rubicon expects to continue to evaluate and investigate international markets for future opportunities.

Company outlook

Rubicon Organics has set out four key priorities for 2023.

1. Optimize yield and cultivation at the Delta facility

Rubicon's priority is delivering superpremium-quality cannabis flower products in the Canadian market. Producing at scale in a greenhouse environment is subject to seasonal impacts and commercializing new strains to meet the demand in market and the company's brand standards can present challenges. Rubicon remains focused on continuing refinement and optimization in its cultivation systems. In 2022, the company achieved several crops exceeding its nameplate 11,000 kg capacity, and it expects 2023 to be a year of steady and consistent quality production. Additional tables will be installed in the facility to improve air circulation and increase capacity in the second half of 2023, with standard maintenance scheduled during downtime.

2. Maximize Canadian premium opportunity

Rubicon is focused on maximizing the gross margin it earns from each gram produced from its Delta facility. Delivering both the right genetics and product formats to the customer at the right price-to-value ratio, and maintaining good relationships with the provincial distributors and retail stores are critical to our success. In 2023, Rubicon is driving to grow the Simply Bare Organic brand and to premiumize opportunistically elements of the 1964 Supply Co brand, the impact of both would be positive on the company's gross profit.

As Rubicon has forecast demand beyond its available supply from the Delta facility, it has begun projects that the company expects to incrementally grow its net revenue and gross profit. Rubicon intends to launch products that do not require the Delta facility's capacity, that the company anticipates will add incremental gross profit to Rubicon's results in a cost-effective and efficient manner, such as through contract grow relationships to Rubicon's quality standards. Rubicon is also actively looking to build its revenue with the launch of new products under the company's existing brands, which can be contracted to other licensed producers thus not utilizing the company's existing capacity. Rubicon intends to deliver this incremental gross profit without significant incremental overhead cost to the company's business, thus driving additional overall profitability.

3. Drive efficiency in processes and systems

As steady state has been established at the Delta facility, the company is now seeking to create efficiency in its systems away from manual processes or those where there is reliance on key individuals, to increase the resilience and repeatability of the company's systems and reduce cost. As part of this process, Rubicon is evaluating new information systems and expects to begin implementing new systems beginning in the second half of 2023. This project will drive incremental cost in the short term, but Rubicon believes it will improve efficiency of the existing business and ready Rubicon for further growth.

4. Create a proud, engaged team delivering outstanding results

With turmoil in the cannabis sector in the last number of years, coupled with the stresses relating to work in the pandemic and tightness of the labour market, Rubicon has seen considerable turnover in the business. The company believes that in order to deliver a premium product to market, its team members being engaged and proud is important to put the company's best foot forward with its consumers and customers. Furthermore, the cost and resources used when there is labour turnover can be considerable. As part of achieving an engaged and proud team, the company has set clear goals and objectives linked to reward, to recognize the hard work and accomplishments of team members. Rubicon has also begun reviewing its company values, listening to Rubicon's people as part of the process and Rubicon's evolution, now that the company is in a more steady state.

Rubicon believes that its cannabis quality, brand positionings 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 the company's operating leverage. Additionally, Rubicon expects to achieve positive cash flow for the full year, pending opportunistic investment decisions.

As a business, Rubicon is now looking to increase the volume of product that it has available for sale to fill the demand the company has for its quality products. The business is evaluating several options to increase its capacity. Rubicon believes that despite any market volatility, inflationary pressures, regulatory change, the company's product quality and brand portfolio has positioned Rubicon to win in the premium cannabis market.

Conference call

The company will be hosting a conference call to discuss Q4 2022 results on Monday, April 3, 2023. Conference call details are as follows.

Time:  7 a.m. PT (10 a.m. ET)

Conference ID:  24261214

Local dial-in:  1-416-764-8646

Toll-free North America:  1-888-396-8049

Webcast:  access on-line

About Rubicon Organics Inc.

Rubicon Organics is the global brand leader in premium organic cannabis products. The company is vertically integrated through its wholly owned subsidiary Rubicon Holdings Corp., a licensed producer. Rubicon Organics is focused on achieving industry-leading profitability through its premium cannabis flower, product innovation and brand portfolio management, including its flagship superpremium brand Simply Bare Organic, its premium brand 1964 Supply Co., its premium concentrate brand Lab Theory, its mainstream brand Homestead Cannabis Supply, and its topical brand Wildflower.

The company ensures the quality of its supply chain by cultivating, processing, branding and selling organic certified, sustainably produced, superpremium cannabis products from its state-of-the-art glass-roofed facility located in Delta, B.C., Canada.

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