Earnings call transcript: Cannara Biotech’s Q2 FY2025 results show strong growth

Cannara Biotech Inc., with a market capitalization of $298 million, reported robust financial results for Q2 FY2025, highlighted by a significant increase in net revenues and net income. The company’s stock price rose by 2.11%, reflecting investor confidence in its performance and future prospects. According to InvestingPro analysis, the stock appears undervalued compared to its Fair Value, suggesting potential upside opportunity. Cannara’s strategic focus on product innovation and market expansion has positioned it well in the competitive cannabis industry.

Key Takeaways

• Net revenues increased by 35% year-over-year to $26.6 million.
• Net income rose by 43% quarter-over-quarter to $3.3 million.
• Adjusted EBITDA saw over 100% year-over-year growth.
• Expanded cultivation capacity at the Valleyfield facility.
• Strong market position in Quebec with a 12.8% market share.

Company Performance

Cannara Biotech demonstrated strong performance in Q2 FY2025, achieving record financial results. The company’s strategic initiatives, including product innovation and facility expansion, have contributed to its success. With a focus on the Canadian market, Cannara has effectively increased its market share, particularly in Quebec, where it is the third-largest producer.

Financial Highlights

• Revenue: $26.6 million, up 35% year-over-year
• Gross profit: $10.8 million, up 11% quarter-over-quarter
• Gross margin: 41%
• Adjusted EBITDA: $7.1 million, up over 100% year-over-year
• Net income: $3.3 million, up 43% quarter-over-quarter
• Earnings per share: $0.40

Outlook & Guidance

Cannara Biotech anticipates continued growth in net revenue and adjusted EBITDA. The company plans to launch in the Quebec vape market in November and aims to activate additional rooms at its Valleyfield facility over the next 36 months, potentially increasing revenue to $250-$300 million at full capacity. Analysts maintain a strong bullish consensus on the stock, with price targets ranging from $24 to $38. Access the complete InvestingPro Research Report for comprehensive analysis of Cannara’s growth potential and market position.

Executive Commentary

Nicholas Soziak, CFO, emphasized Cannara’s commitment to long-term success, stating, "We have built a foundation for long-term success with world-class operations, financial strength, and relentless execution." He also highlighted the company’s passion for the cannabis industry, saying, "We are not just another cannabis company. We are passionate cannabis advocates."

Risks and Challenges

• Supply chain disruptions could impact production and distribution.
• Market saturation in the cannabis industry may pressure prices.
• Regulatory changes in Canada could affect operational strategies.
• Economic downturns might reduce consumer spending on cannabis products.
• International market expansion poses potential risks and uncertainties.

Q&A

During the earnings call, analysts inquired about Cannara’s focus on the Canadian market and its decision to avoid international expansion. The company emphasized its strategy of investing in product innovation and maintaining competitive pricing to strengthen its market position. Additionally, Cannara highlighted its efforts in vertical integration and quality control to ensure product excellence.

Full transcript - Cannara Biotech Inc (LOVE) Q2 2025:

Scott Carroll, Moderator, Canara Biotech: Good morning, everyone, and welcome to Canara Biotech’s Fiscal Year Q2 Earnings Presentation for the three and six months ended 02/28/2025. My name is Scott Carroll, and I will act as a moderator for today’s presentation. As a reminder, this presentation is being recorded. Following the prepared remarks, we will conduct a question and answer session. If you haven’t already done so, you may submit your questions to investorscanera.ca or in the chat option in your conference browser.

Should all submitted questions be addressed today, we will follow-up accordingly via e mail. Before we begin, please refer to Slides two and three of our presentation. All information presented today is subject to our general disclaimers on financial measures and forward looking statements, which are also available to be read in detail at sedarplus. I will now turn over the call to Nicholas Soziak, Chief Financial Officer.

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Good morning, everyone. Thank you again for joining our Q2 earnings webcast. My name is Nicholas Soziak. And as CFO of Canara, I have been deeply involved in every aspect of this company since 2019. From cultivation to processing, finance strategy, sales and marketing and product development, we’re working alongside our team to drive success.

I’m deeply proud of Canara for being one of Canada’s largest vertically integrated cannabis producers, driven by strong financials, innovation and a consumer first approach. What truly gives Canara its competitive edge is our control and execution. We’ve built one of the most cost efficient operations in the industry, while maintaining market leading quality. As this is our first public quarterly earnings presentation, I will provide a brief summary of who we are and where we are going as well as the underlying competitive advantages within our business. Canara Biotech is a leading large scale vertically integrated licensed producer of premium grade cannabis proudly based in Quebec, Canada.

We are the seventh largest licensed producer by sales in Canada, and we are the third largest producer by sales in Quebec, Canada’s second largest province. We are the fourth largest producer by square footage nationwide and the largest producer in Quebec, with a total of 1,600,000 square feet of fully built out hybrid indoor cultivation space. Currently, these facilities produce 33,500 kilograms and will be producing just under 40,000 kilograms by May of twenty twenty five. Fully scaled, our platform has a potential to scale up to 100,000 kilograms per year. As a vertically integrated company, we handle all the processes in house.

We view this as a key competitive advantage as it allows us to increase our quality and have full control of of our supply chain. Something much more relevant in today’s Canadian market where third party cultivators can be unreliable and where increased wholesale market pricing is squeezing margins for bulk purchasers. We believe we have built one of the strongest operational platform in cannabis with almost every single aspect of our operations levels evolving beyond the standard cannabis company. We are real cannabis operators with a real passion for the plant, and we are constantly evolving our technique to further distance ourselves. Fiscal Q2 twenty twenty five represented the strongest quarter in Canara’s history.

We delivered record revenue, record gross profit and gross margin, and and record operating income and record adjusted EBITDA. During the quarter, we achieved net revenues of $26,600,000 up 6% quarter over quarter and 35% year over year. We reported record high gross profit before fair value adjustments of $10,800,000 up almost 11% quarter over quarter and returning us to previous record high gross margin of 41%. We also delivered an adjusted EBITDA of $7,100,000 up 18% quarter over quarter and representing over 100 year over year growth. This represents a 27% adjusted EBITDA margin, a two eighty basis point improvement and an almost 900 basis point improvement versus the prior year period.

This marks our sixteenth consecutive quarter of positive adjusted EBITDA and our fourth consecutive quarter of positive net income. We have one of the strongest financial profiles in Canadian cannabis. We have been in net income positive on an annual basis since fiscal twenty twenty one, operating cash flow positive on an annual basis since 2022 and free cash flow positive on an annual basis since 2023. Our success comes down to three key advantages, premium quality, scalability, and cost leadership. We produce premium quality cannabis at scale and enter the market with disruptive pricing making our products accessible to a wider audience.

Our approach combines rare genetics, flavorful high cannabinoid strain profiles and sophisticated cultivation methods such as hang drying, hand trimming and slow curing at scale to ensure clean quality product that’s never irradiated. We’re leading the charge in this dynamic market with significant investment and effort dedicated to our in house pheno hunting platform and a strategic partnership with 50 time award winning cannabis breeder exotic genetics, enabling us to set trends rather than follow them. The popularity of our brands is a testament to the quality and consistency of our entire CPG portfolio. When consumers choose Canara brands, they know exactly what they’re getting, premium quality cannabis at the best value. On top of all this market success, we maintain one of the cleanest balance sheets in Canadian cannabis with ample cash flows to service debt and no significant near term maturities until December of twenty twenty seven.

In the second half of this year, we will begin to prepare our operations to further address the still uncaptured demand for our brands as well as prepare for Quebec’s November vape launch demand by expanding our cultivation capacity by almost 20% or 6,000 kilograms for only $1,000,000 in capital outlay. We believe that this ability to expand internal capacity for such a minimal capital value is a significant competitive advantage and represents one of the highest ROI investment opportunities available for any company in cannabis today. Our market share expansion has outpaced our peers driven by premium quality cannabis that we are able to sell at affordable prices due to our competitive advantages in our low cost operational strategies, efficiencies of scale, as well as our access to Quebec’s low electricity rates. As of February of twenty twenty five, we hold third market position in Quebec with 12.8 market 12.8% market share, up over 40% from 9% share in the prior year period. For March, we gained 60 basis points while Quebec’s number two LP lost 80 basis points.

Canara is now only 60 basis points from the number one spot representing a significant improvement from six months ago when we were just over 300 basis points from the number one spot. Our strong performance in our home province is extremely relevant and sometimes overlooked by cannabis investors. But in Quebec, there’s almost no sales and marketing strategy permitted, including the use of data deals. We believe our performance in Quebec is a strong indicator of our ability to capture share in the rest of Canada through a truly better quality product offering than our competitors. Nationally, we hold seventh position in the market with a 3.9% market share up from 2.9% share in the prior year period, making us one of the fastest growing LPs in Canada and the only top seven company to gain share this quarter.

Turning to our CPG portfolio. We are a leading operator across many product categories. Our greatest example of disruptive pricing strategy is our tribal flower priced at only $30 a Nathan, Ontario, but maintaining consistency, flavor, nodes and freshness comparable with ultra premium priced flower offerings priced upwards to over $50 a unit. This value proposition has allowed Tribal to capture number one nationwide share premium 3.5 gram flower growing share by over 25% over the last six months to now over 18% share of the category. We also maintain nationwide leadership of the premium vape category where we hold over 22% of the share with monthly retail sales up almost 70% over the last twelve months.

This leadership is an important contrast as it represents our ability to win even when we’re positioned as the highest price option in the category. This is valuable proof that we are not only able to capture share through disruptive pricing, but also by being providing the highest quality option available in that category. This leadership in the premium category is also a strong potential indicator of future performance once our home province of Quebec opens up the vape market in November of twenty twenty five. We are the fastest growing infused pre roll multipack in Canada as well with number two nationwide share of the category. From December 2024 to April 2025, we increased our share by 18% to 10% market share of that category, while the number one operator saw a share decrease of 2% during that period.

Our success also comes while commanding a much higher average retail unit price than the category leader at almost $10 a unit higher. We are also seeing incredible category leadership for infused pre rolls in our home province of Quebec, where we command over 73% of the share of infused pre rolls in Quebec. Our market share reflects the strong underlying operational strengths of our platform and our real boots on the ground competencies as one of Canada’s leading premium cannabis operator. Canara operates two state of the art mega facilities in Quebec, enabling full vertical integration across all of our processes. Our Farnham facility is dedicated to the operation of the nursery, our pheno hunt process, post harvest process, and packaging.

The facility is 625,000 square feet of which we occupy a 70,000 square feet today. The balance of the building is currently being leased out to two tenants which generate up almost $4,000,000 a year in rental income. Our Valleyfield facility at 1,100,000 square feet is a purpose built for hybrid indoor cannabis cultivation. It is one of the largest facilities in the country and the largest cannabis facility in Quebec. The facility has 24 growing rooms, each room measuring 25,000 square feet each and each room has been redesigned to replicate indoor growing conditions.

We operate 10 rooms this quarter and happy to report achieving our twenty twenty five objective of activating two more rooms with one being on turned online in April and an additional one scheduled next month, May twenty twenty five. These additional two rooms will add 6,000 kilograms or almost 20% additional capacity to our platform and increasing our 33,500 kilograms to just under 40,000 kilograms. Our Valleyfield facility is a particularly significant asset. We acquired the facility in 2021 for just under $27,000,000 This was an extraordinary opportunity considering the incredibly overengineered facility was built during the overspending gold rush period of Canadians initial legalization. And the facility’s original construction costs exceed over $250,000,000 This acquisition at a fraction of its value has given us leading access to mass scale, low cost cannabis cultivation for our business.

We are delivering strong market share growth, have no current view of our demand ceiling, have an array of different product categories, packaging sizes that we currently don’t offer, and through our Phenohunt program, we’ll have access to an exclusive genetic bank that will continue to fuel Canadian retail demand. Furthermore, we see strengthening unbranded wholesale market that we currently barely participate in and increasing demand in international markets that is currently not our focus. Given these variables, we believe there is ample opportunity to continue to expand our capacity and we will continue to do so into fiscal twenty twenty six and beyond. The remaining 12 rooms of Valleyfield facility will be turned online over the next thirty six months, bringing our total cultivation capacity to 100,000 kilograms per year. Most importantly, and a key competitive advantage within our business is our ability to turn online this additional capacity with very minimal CapEx outlay.

Given the rooms are already completely built out and only require minimal investment such as lighting, tables and HVAC. Rooms 11 And 12 as mentioned previously, activated in April, the next one being activated in May, cost approximately $1,000,000 in CapEx to activate. And we project the capital return period within the first operations. Fully scaling Valleyfield can enable us to generate between $250,000,000 to $300,000,000 in net revenue assuming our current market conditions hold. As Canada’s Second largest province with over 9,000,000 people, Quebec provides us a home field advantage and access to some of the lowest utility and labor costs in Canada.

One of the most compelling benefits is the province’s exceptionally low electricity rate at just 5.3¢ a kilowatt, substantially lower than those in other provinces such as Alberta, where rates as high as 13.6¢ a kilowatt. To our benefit, our Valleyfield facility pays a further reduced rate of $0.37 a kilowatt due to its location in a preferred agricultural development zone. Since electricity and labor costs account for over 75% of our indoor cultivation expenses, our Quebec positioning gives us significant competitive advantage in our ability to be disruptive with our pricing while still generating industry leading margins and cash flow generation. Beyond low electricity costs, Quebec presents the highest barriers to entry, particularly with strict restrictions on sales and marketing. These combined factors, combined with the lack of retail data deals make Quebec an ideal environment for Canara’s growth.

Canara Biotech stands out as one of Canada’s most profitable cannabis producers. We’re nearly consistently delivered market share growth, revenue growth, industry leading margins, and positive operating and free cash flow. We have clean balance sheet and with manageable debt profile and nearly industry low interest rates. During the quarter, we achieved record high gross revenue of $37,700,000 and net revenues of $26,600,000 marking an impressive growth of 6% quarter over quarter and over 35% year over year. This reflects expanded market share and product launches with increased distribution and is promising given the softer fiscal Q2 period, which was influenced by seasonality.

Gross profit before fair value adjustments for the quarter hit a record high of $10,800,000 returning us to our previous record high gross margin of 41%, representing a 170 basis point improvement quarter over quarter and a three seventy basis point improvement versus the prior year period. The increase reflects increased yields, cost efficiencies and the larger portion of our revenue coming from higher margin products such as live resin and dry flower. This returns us above our 40% internal gross margin target, which we believe there is further room for improvement as we scale further into our capacity. We’ve continued to maintain strong cost controls across the organization, reporting operating expenses during the quarter of $6,100,000 representing under 23% of our revenue. This reflects positively against the previous quarter and the prior year period where operating expenses represented over 2431% respectively.

This improvement in operating expenses margin reflects our activation of cultivation rooms within our fixed cost base despite increased sales and marketing spend to maximize the launch of our Q2 flower strains and manufactured products as well as the support of upcoming Quebec vape launch in November. We delivered a record high adjusted EBITDA of $7,100,000 up 18% quarter over quarter and representing over 100% year over year growth. This represents a 27% adjusted EBITDA margin for the quarter, a two eighty basis point improvement and an almost 900 basis point improvement over the prior year period. Operating cash flows for Q2 was an outflow of $2,600,000 bringing year to date cash flow to a positive $3,300,000 Q2 free cash flow came in at an outflow of $4,000,000 bringing our year to date free cash flow to 600,000 This quarter, our operating cash flow, which in turn reduced our free cash flow, was a result of prepaying our excise tax obligations of $3,500,000 before the end of the quarter and before the actual cash was collected from our related receivables. In addition to investing over $1,500,000 in advanced deposits for packaging materials sourced overseas to reduce our cost and stock outs in fiscal twenty twenty five.

We generated net income of $3,300,000 and an EPS of $0.4 per share for Q2, up 43% quarter over quarter. Net margin for the period was 12.5% versus 9.2% for the prior year quarter. During the quarter, we also made significant effort to further strengthen our balance sheet. In February, we announced the extension of our 34,000,000 BMO credit facility to December of twenty twenty seven, while maintaining our floating interest rate, which is currently below 7%. We also extended our smaller $5,700,000 convertible debenture to March 2028.

For fiscal twenty twenty five guidance, we’re forecasting growth in both net revenue and adjusted EBITDA from our core business on an annual basis. We anticipate to continue to generate positive operating cash flow and free cash flow on an annualized basis for this fiscal year. While many Canadian LPs are expanding overseas out of necessity, we are thriving in Canada by choice. The reality is that most can’t compete profitably here. They’re losing market share, struggling to build brands, and failing to operate efficiently.

This industry isn’t just about capital. It’s about experience, knowledge, and most importantly, execution. Canara has built this from the ground up. Every process we’ve developed is designed for long term success, not short term survival. We’re not just another cannabis company.

We are passionate cannabis advocates. We are boots on the ground operators, market leaders, disruptors, and a company built for sustainable, profitable growth. Our financial performance speaks for itself. 16 quarters of positive EBITDA, industry leading margins, operating in free cash flow on an annualized basis, and our market share is up over 30% in one year as we continue to prove that we can capture share through leading quality and disruptive pricing strategies. We dominate in key categories with constrained demand brands while owning the ability to triple our production capacity organically with our industry leading organic high ROI internal expansion opportunities.

We have proudly built a foundation for long term success With world class operations, financial strength, and relentless execution, we believe we are positioned to shape future of Canadian cannabis. Thank you for taking the time to learn more about Canara. We’d now be happy to open the floor and take your questions.

Scott Carroll, Moderator, Canara Biotech: So thank you, Nick. We’ll now transition over to our Q and A portion of the earnings presentation. Nick, on your side, is your mic now, unmuted?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. Just the video is not working.

Scott Carroll, Moderator, Canara Biotech: Just one second here.

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Alright. I think we got it.

Scott Carroll, Moderator, Canara Biotech: Perfect. So as as mentioned, in our our press release, we received questions to our investors at Canara dot c a email. As well, for the attendees of today’s, web presentation, you’re welcome to submit your questions through direct chat. So I’ll start with the first one that we, received, Nick. So it’s you’ve spoken previously to an internal goal for number one Quebec market share.

You’re closing greening ground. Are there any specific catalysts that could push you to number one in Quebec?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. No. Absolutely. Firstly, the first thing to remember is that in Quebec, we can’t conduct any traditional sales or marketing activities. So the value proposition of the product that we create speaks extremely highly about the sales that we’re generating, here in Quebec.

We are leading across quality, across every segment and category, and we’re typically better priced than our competitors. And this builds really a strong performance that is, you know, the reason why we’re outperforming here in Quebec. And I think that’s just gonna continue to escalate as our our our original SKUs, will continue to gain traction. And, in Quebec, every six months, there’s new product launches. So every six months, we’re launching new genetics as well as new products.

But what I’m really, really excited for is, actually this week, we launched, the tribal trifecta in Quebec. And the tribal trifecta is a very unique infused pre roll. It’s a premium price pre roll, and it’s used it uses live resin, genetic specific live resin. So we take our genetics such as the Cupid links, and we create live resin from it, and then we infuse the sauce inside the flower, and we put the diamonds on the outside of the joint. And, because we’re fully vertically integrated and this product is created with our own genetics, totally transformed within the organization, we strongly believe that this product is extremely hard to replicate.

And currently, there’s no diamond coated joints here in Quebec. So I think this is going to be a product that’s going to, really, take traction, in in the coming quarter. We’re also launching a new genetic, our meat pie, and our porto leche, so that’s exciting. And, yeah, vapes are coming in November, for Quebec, which is a totally brand new category. And that, as as you all know, we’re we’re one of the largest producer of, live resin, vapes in the country.

So having bringing this, product here in Quebec, is extremely you know, we’re we’re very confident that that our product is going to take traction and, take a really good portion of the, upcoming, vape category here in Quebec.

Scott Carroll, Moderator, Canara Biotech: Yeah. It’s perfect. Thank you. The next question, looking back towards q two, were there any standout product successes or key highlights across your portfolio that you could expand on?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. Our recent genetics, Neon Sunshine and BubbleUp, again, we took almost a year and a half to pheno hunt those, genetics. So and that that goes across all our genetics going forward. It’s it’s a year and a year plus plus a couple of months to really get a genetic to market. So the neon sunshine and the bubble up are are showing the fruits of our labor.

They’re they’re they’re they’re just they’re catching up right under Cuban links. And Cuban links, you know, pheno hunted almost four and a half years ago, is still, outpacing, the holding places number one genetic in our tribal portfolio. But Neon Sunshine and BubbleUp are taking second and third, so that’s, just a matter of time, where, you know, those two genetics are are going to dominate the ranks. And we also just launched them, in live resin, and vape extract, which is also going to further promote the genetic base within within tribal. Beyond that, we’re we’re the the the trifecta from tribal, we’re we’re really excited to see it, launch in Quebec, but it’s already in Ontario.

We’re we’re launching in BC and, bringing it into Alberta as well. It it really has grown. It’s the fastest growing mass premium multi pack infused pre roll. We put a lot of innovation work in. Just the just the the manufacturing process is so technical and labor intensive, to get it right, but but we feel like we mastered that.

And and, again, the trifecta commands a $10, price point higher than our competitors. So this is a clear sign of, you know, Tribal’s brand strength and consumer demand. And the fact that we can play, you know, we’re usually priced in that medium priced tier, but there’s some products as we create because we’re trying to create the best quality. There’s some advantages when we’re first mover in a category to take, you know, premium pricing. So first is, our focus on building tribal as trend setting house of genetics.

And then the really, what what what we’re proud of is our vertical integration. You know, we’re creating all our flour. We’re growing all the flour. We’re creating all the BHL. We’re creating all the keys.

We’re doing all the THC diamonds all in house so we really get to control the quality of the inputs. And, you know, that’s what we put into our product, and that’s what’s succeeding, this quarter. So Neon Sunshine, BubbleUp, our Trifectas, our Infused pre rolls, our Vapes, they’re all seeing, quarter over quarter increases.

Scott Carroll, Moderator, Canara Biotech: Perfect. Thank you. We received a question or direct chat, from Steve g. It says, I know in the past you’ve mentioned that you’re happy with the price point, but with comparable products priced at $50, at what point in the growth profile might you consider pricing as a way to drive margin improvements?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. Again, we’re we’re really not focused on, increasing our pricing to drive margin. We have several ways to drive margin outside of just increasing price. So the first one is is yield. You know, we’re as we’re genetic house, you know, for we’re investing all the money and resources in finding genetics for, you know, an unforeseeable, amount of time, to really build a roster of genetics.

These roster genetics will, you know, have the THC, have the flavors that we’re all looking for that the market wants, but most importantly, have high yields. Right now, our average we we started, you know, some genetics at 60 grams a plant. Now our average is around 85 grams per plant, and we have some plants that are growing over a hundred grams per plant. So just increasing, finding those right genetics will increase our margin and not have to take, increase our price. And, again, price is very important in the cannabis market.

There’s a fine line be between where the volume drops off significantly, if you try to price your aids or any products in the premium range. So, really, we’re trying to capture volume. We have a hundred thousand kilos to sell. So pricing you know, we’re we’re we’re extremely proud about our pricing and being affordable and giving quality products, you know, in that in in the mass segment of of the price point that most people buy in, and that’s what’s really going to take over, the market and and scale our brands to to to number one. Furthermore, just cost savings as we grow more weed, our fixed costs don’t increase.

It cost us $700,000 to turn on a room, and five people to, to turn on the room, and we can generate, you know, three over 3,000 kilos that year. So our fixed cost will stay the same, but then, we’re producing more and generating more revenues. So we’re gonna see efficiencies and margin increases there. And and just just scaling economies of scale, you’re buying more product, You have more packaging needs. You have more, power, to negotiate, with your suppliers.

So it’s really important that we use those, strategies to, to scale our business and not price. Price, if we do price, it would probably in another brand, a segmented brand that we would create, and they would have other characteristics that would justify, the increase in price.

Scott Carroll, Moderator, Canara Biotech: Perfect. Thank you, Nick. And we’ve seen another question, via chat from Mark Haas. It says, great quarter, great outlook. Any status update on the building sale?

Upon sale, could an NCIB be possible, or would you keep the capital for CapEx working cap to scale growth? And then in addition, any opportunity for cheaper funding or prepayment of the convertible debt at approximate 10% rate?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. Great question. The asset held for sale is, you know, anything could happen in real estate, but, we are, you know, we we we do have potential interested parties. We’re we’re confident that a trans that we might see a transaction, very soon. So that’s, definitely in the in the works.

And, in terms of the sale of the building, if we do sell, the building, we would use the cash, to continue to invest, in building out Valleyfield. We have 12 rooms. The next phase to go from 12 to 24 is we have to build out a processing building, and that’s a $77,000,000 spend. And then we have, starting from rooms 12 to 24, we have to buy lights as well. So now the cost per room increase is about 1.2, one point five.

So we’re gonna utilize that cash from the sale of the building to continue, investing into Valleyfield and opening more, road rooms. In terms of reducing, our our interest rate on our convertible debenture, absolutely. It’s an open ended convertible debentures, we can pay it down any time. The objective, we make way more ROI on taking the cash and investing it into the grow rooms to produce more cannabis. And at what at the point that we do have excess cash flow, you know, in the coming year or two, we would be looking to prepay the highest debt, that we have on the books, which would be the convertible debenture, if it’s not converted by that time.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. We received another question from Raymond. With the positive momentum this quarter, are there specific operational efficiencies or process improvements you are targeting to further enhance margins as production volumes continue to grow?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: The team’s working every day on process improvement. We’re we’re we’re really building a fully vertically integrated cannabis company, and we’re building it from the ground up. So these are processes that we built from day one that, you know, from day one to where we are today. We’re continuously improving our our operations from cultivation to the way we grow to trying different trials to get more yield or to reduce cost on on a certain point with all without affecting quality. In our pre roll department, we’re purchasing more machines.

We’re scaling up the the amount of pre rolls that we’re making. We’re automatizing the hard to create pre rolls like our trifecta and our kingpins on the supply chain. We’re improving our transport. We’re we’re really taking cost advantage. We buy a lot overseas, which, you know, proves to, bring a lot of cost savings, but also supply chain issues.

So we’re investing in in in our supply chain to really streamline, the the the supply of our packaging and cost efficiencies on that point.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. Next question received by email. Can you provide some color on the factors that contributed to the quarter over quarter market share decline observed in Saskatchewan and Manitoba this past quarter?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. So we’ll start with Saskatchewan. The first one is that we transitioned to a new wholesale partner, during q two. So that led to some temporary disruptions in our ordering and supply availability. But that was for a good reason.

The transition really was to go to a new wholesale supplier that we believe will bring in additional revenues and really, most importantly, bring in additional distribution, in Saskatchewan. So we’ve completed all that during the quarter, and now we’re really positioned for recovery in the upcoming quarters, for Saskatchewan. For Manitoba, we strictly really prioritized our products this quarter to our high volume markets, like Quebec, Ontario, Alberta, BC. So, unfortunately, Manitoba, was the last one on the list to get, products due to constraints on product availability, and that impacted our overall market share, in that market. Really, the decision for us is that we have to scale in Quebec.

We have to scale in Ontario, Alberta, and BC. Those are our main markets. We need to dominate in those markets. Saskatchewan and and and Manitoba, Nova Scotia are ancillary markets at the moment until we really scale and and and build out our distribution in those. But we’ll continue focusing in the quarters to come.

In Manitoba, we expect to rebalance and increase supply chain and increase revenue generated from that province.

Scott Carroll, Moderator, Canara Biotech: Thank you. The next question is, what do you think were the leading factors in establishing such a strong share of the Quebec infused pre roll market?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: So we came to market, like, right out the bat with a superior product, superior consumer experience. You know, our infused joints, they’re they’re created with Indian bud that we grew up. Usually, infused joints are how to source the cheapest cannabis, and most of the time, the shake or trim that is on the floor. But we use our whole bud. We use cured resin cured resin produced from our whole bud.

Most infused pre rolls are used with distillate. And distillate, as we all know, is a lower grade of of quality in terms of high and in terms of flavor. We also use our kef that we create here. So this is kef that’s fresh kef, genetic specific keef too, not mixed up, not two years old. So all of that components plus the flavors that we’ve created and really r and d to really find flavors that resonate with consumers, We all handled that r and d internally and really created a product that we knew guaranteed freshness, consistency, and and and quality.

And and that was you know, we wouldn’t have been able to do that with without our being fully vertically integrated and controlling every step that we do from cultivation to extraction. So by not relying on third parties to produce these joints, we have void risks that, you know, become having consistency and quality issues. And that single handedly, you know, can reduce or completely eliminate volume in a product. So being consistent and having that quality, you know, really propelled our infused tree rolls in Quebec. Over 70% of the market, which is insane.

And now we’re introducing our trifecta, which is, you know, a level up. So I’m I’m really excited to see how that’s going to play play out. And, yeah, I think that’s why we’re we’re succeeding here in Quebec.

Scott Carroll, Moderator, Canara Biotech: Thank you. Next question, proceed. Congratulations on opening two additional grow rooms at your Valleyfield facility. Do you expect the additional yield from these rooms to be fully absorbed by market demand immediately, or do you anticipate a ramp up period as you expand distribution and your product portfolio?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. So, firstly, like, we only open rooms when we see, you know, our increasing demand and increasing support and distribution for our products. We’re number seven nationally, so we still have, you know, six more companies to, take market share for and absorb, you know, market share increases as time goes by. And we’re climbing the ranks. Quarter over quarter, we’re climbing the ranks.

We’re increasing our market share. So we’re going in the right direction, and we’re extremely, you know, diligent in our planning. We have a sales forecast that we plan from item to province in detail, and we transform that into unit base into how much cannabis does does it take to produce that unit. And then we go on our other side, on our production side, and we look at how many rooms we have and how many how much cannabis can that, or category of cannabis can that rooms, produce. And then we match one minus the other, and we get a gap forecast.

And that gap forecast is, you know, what really triggers, opening more rooms. So we do it very diligently, and we see that flag come up, and we’re we’re like, okay. Let’s turn on another room. So really why that happened is one organic growth across all all of our SKUs and, you know, SKUs that have been here for four or five years are still selling Cuban moons across all the flower, dried flower, pre rolls, live resin, still selling. We wanna launch new products.

We wanna launch new genetics. We have a whole roster of genetics waiting, but we got no room to, plant those. So we gotta we gotta open more rooms. Also, really, you know, we have to understand is vapes are coming to Quebec. That’s huge.

I think it’s gonna be 10% of the sales here in Quebec, as as it scales up. So we wanna play a meaningful part of that market, and we can’t be out of stock. So and, you know, that volume could increase significantly, so we have to be ready for that moment. And that’s really the reason main reason for opening the two rooms this year, is to be ready for November, when vapes come. But in between there and that, we have, you know, the trifecta’s coming up.

We have our meat pie that’s launching. We have Wagyu Delight. Outside of, Quebec, we have our Porto Lecce. We just pheno hunted, three new genetics on it. You know, we have that to put into the pipeline.

So we have a lot of products that that we want to scale up. We looked at our demand gap. We see the we see, we see we see the gap, and that’s why we’re turning on two more rooms. And, we’re gonna be planning another three more rooms, in the in the for the next year and then scaling up to the full 24, really, with the objective of selling all of this cannabis here in Canada. And if you know, that’s that’s really the objective, and we have to open more rooms to achieve that objective.

Scott Carroll, Moderator, Canara Biotech: Thank you. Next question received. Previously, you’ve mentioned that Canaris’ focus remains on growing its brands within Canada without pursuing international export opportunities at this time. Has there been any shift in your view or strategy regarding potential international expansion?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: But there’s also a lot of unknowns. And establishing a primary international business right now, I believe, has a lot of risks. As an example, tariffs, tariffs, tariffs, you know, hottest topic right now, tariffs. Any day, any of those countries could slap a tariff on you and change your whole business overnight. So that’s, you know, that’s unpredictable.

There’s regulatory, things are building out. Plus all our competitors are going international. That’s really the, the hottest topic to, you know, in Canadian cannabis right now is is is selling international. And, yeah, you’re making a lot of money. You’re making profit.

You can start building a sustainable or, you know, start building a business and hopefully become sustainable if you can manage all those risks. But for Canada, we we really, really do see the opportunity here in Canada, and we have to stay focused. It’s really important. Name of the game is consistency, and without if we branch out too quick too fast, we’re gonna lose that consistency. So staying focused on Quebec, sorry, on Canada, and all our sales in Canada.

That’s that’s that’s that’s our number one strategy. As we, you know, as we build out and we see, you know, definitely use the the international market or the wholesale market as, an ancillary revenue stream, as we build out to keeping our product fresh. Right? You have to remember that cannabis is a it ages over time, and you wanna make sure that you get that product within the first three to six months to your, to your client. So as we grow, we might have some overages that, that we couldn’t, you know, sell in time for the six months or get the distribution.

So we’ll use the b to b market and international market to, absorb that cannabis, make money, make margin on it, and and and and utilize that, avenue, but really with the focus on Canada. And then once we achieve our Canadian, objective of being number one or the top, you know, up definitely top three producer in Canada, with the ultimate goal being number one, we’re we’re we’re we’ll we’ll look to international. Of course, you know, we’re we’re a cannabis company. We’re gonna build once we dominate Canada, we will look into international, bringing the brands that we’ve created here in Canada that, you know, Canada’s known for, bring them international overseas in those markets and, you know, growing, growing the proper way in those markets, over time. So that’s that’s how we’re going to, handle, the international opportunity, long term.

Scott Carroll, Moderator, Canara Biotech: Thank you. Next question received by email. The PR mentions an early remittance of excise taxes, and I’m curious why. If you could touch on this and maybe the working capital movements in general, how you expect this to normalize over the coming quarters, that would be great.

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Yeah. So for operating cash flow, we did pay prepay, our excise tax obligation before the end of the month. As you know, like, taxes, it’s due the previous, month’s due, by the thirtieth of the next month. So we usually, paid in the past, we paid it the one day right after where there’s no penalty or interest or anything like that. This, we’re trying to just be more, diligent and, you know, remitting on time even though there’s no penalties because we did have that extra cash, And it was just a timing issue.

So we did make a 3 and a half million dollar payment before the end of the month, and we didn’t receive the related cash revenue from sales, for for for that, transaction. So that created a a gap in in in in our cash flow, a timing gap, which we’re gonna see, flip in q three. We also invested, over $1,500,000 in prepaid packaging. So this is what I’ve mentioned earlier of trying to take cost advantages by buying bulk and buying overseas and avoiding supply chain issues. So we’re we we really purchased over six months of stock, from, from overseas that, you know, where where it takes two two months to to to receive the stock.

So we invested in that. So that, you know, we we that affected our operating cash flow and in turn our free cash flow by close to $5,000,000. And, that you know, we’re gonna see the flip of that, and the benefits of that in in cash flow come in in q three as we don’t have to spend cash on on on pre packaging material or as much cash on packaging material, and then we get the flip of the revenue coming in without the, the related, excise tax payment, in q three. So that’s that’s hopefully explained the the reason on the, operating free cash flow.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. Next question. You have mentioned in the past that you have invested in a growing sales team leadership and boots on the ground field Salesforce with a stronger focus on sales and marketing efforts. Are you seeing any early results from this, and what are the primary objectives they are pursuing?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Launches, you know, previously to the sales team coming on at the end of twenty twenty four, all of our launches were just launched and no one would was made aware, but people loved our brands that, you know, the butt tenders would make themselves aware, that, these launches were available. So now, you know, we have a sales team that can propel launches and and and get that into market. So that’s you know, we can get penetration easier into those, stores and and build a SKU base and eventually build over time more revenues, generated from each store. So each you know, the the the real objective of our sales team is to educate our network. You know, they have to educate the whole bartender retailer network on all our products, all our launches, upcoming launches, and that’s really to support the innovation and product line extensions that we’re building.

They’re also tasked to increase number of SKUs when they go into a store and they see how many SKUs that they’re carrying, four SKUs, five SKUs can air. When we have over a hundred SKUs, let’s this is how we have to, you know, get those SKUs on the shelf so that customer can buy. We’re deploying trade marketing assets previous to end of twenty twenty four. You walked into a store or retail store across Canada. There was no marketing trade display assets for Canara, tribal nuns, or Orchid.

So we had to compete. You know, the customer would only know about a tribal product if they heard about it from a friend or the budtender recommended it. But the whole store in front of you would be littered with advertising from any other any other brand. So now we’re deploying those trade assets, and we’re deploying them right and smartly, and, you know, we’re not putting a huge budget behind it at this point. So it’s it’s one of our tools in our toolkit to, increase revenue, but that’s something that we’re doing and it’s going to pay, dividends over time.

We’re also supporting our retailers, our consumers, with better in store execution, product education, and, you know, just overall service to strengthen our our relationship with them, which in turn, you know, improves the sell through of our product at those stores. So you’re really it’s just, you know, continue pounding the pavement. We’re we’re we’re pounding for strong, retail engagement. We’re extend we’re expanding our our distribution points. And, you know, right now, we’re just seeing the early impacts of of of market share increases, and, that’s going to increase quarter over quarter as we build it up.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. Next question received. Congratulations on earning the number one market share position for mass premium 3.5 gram flour with Tribal. We understand that a portion of consumers are trading up to a larger formats of seven gram to 14 gram. Could you comment on how tribal plans to address the shift in consumer purchasing behavior?

And, Nick, just just one second. Sorry to to cut in, but, your your microphone seems to be it’s not on mute, but we’re not catching you know, when I just say a word again and see if see if that works? Yeah. That’s perfect. Thank you.

Nicholas Soziak, Chief Financial Officer, Canara Biotech: So, yeah. No. I I think, thank you for that. We’ve worked really hard on creating tribal and focusing on the three and a half category, and we’re proud to have a commanding market share, of that category. We see increasing sales in seven grams and 14 grams.

We’re evaluating the opportunity, but under tribal that is. Under NUGs, we’re playing in the seven grams and 14 grams, you know, we’re actually having a lot of success under tribal sorry, under NUCs with the seven grams and 14 grams. But I’ve been asked a lot for tribal, why don’t we go into the seven grams and 14 grams when, you know, everyone’s playing in that market? I strongly think that there is a good place for tribal in the three and a half grams, And, you know, we’re gonna be launching genetic. We we were we we wanna be, as mentioned before, a house of genetics with a roster of 20 plus genetics.

So and that’s consistent staying over time. So having three and a half gives customers options. And if we were to play in the seven grams or 14 grams at one point in time, it would be a mix a mix option where, three and a half of one flavor and a three and a half of another flavor would be offered under the tribal, you know, multipack to address the seven grams and the 14 grams, segment. But for now, really, we’re we plan to dominate the three and a half gram market under tribal. We think it’s the most accessible, and we wanna give accessible highest quality cannabis.

And that’s how we do it under tribal. And then NUGGS plays in the seven grams and 14 grams for now. And then over time, we will see if Tribal will, generate or or bring to the market multipacks, under its two and half categories to reach the bigger formats like the seven and the 14.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. Next question received. How much wholesale demand are you currently seeing in the market, and how does the tightening supply demand balance across Canada influence your expansion strategy?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: We’re seeing, the market increase. The wholesale market is definitely, on fire, and I’d say almost the pricing has doubled, since last year. The reason why it exists is because international, and and international and the fact that, you know, most a lot of licensed producers actually closed down production space. So, and they moved to a strategy of more CPG strategy of just purchasing the cannabis. So at one point when the industry was in oversupply, I’d be pretty confident to say that we’re in an undersupply situation right now, and that, you know, a lot of the cannabis is going international.

And, it’s it’s, it’s causing pressure on on the the the Canadian cannabis, offerings. It’s increasing the price, and it’s, you know, harder and harder for can companies to make a margin, that are not producing cannabis, because they’re the most successful to price increases in, wholesale cannabis. For us, we’re not affected because we’re growing the cannabis. And if anything, it’s an advantage to us, because, we can utilize the wholesale market, for ancillary cannabis that we have in inventory. So we use the the wholesale market really as a backstop.

We use it as a stop gap, and it, really allows us to derisk our, operation. And, yeah, we we, again, prioritize all the cannabis for our main brands. But as we scale, you know, that that that avenue is very useful, and I think it’s just gonna continue increasing because there’s not more production space coming online. And if anything, there’s more international sales as more, countries recreationalize or, or or have a medical program. So that’s gonna continue putting pressure on on the supply of cannabis here in Canada.

And I think that’s a good condition, for Canara to, to be in as growering as a grower of cannabis of over 40 or just under 40 tons of cannabis and, you know, on track to build out a hundred tons, in the next, three years.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. You’ve touched on on this, a little bit, in some previous questions and answers, but the next question received is, are there any upcoming product launches or innovations in the pipeline that you’re particularly excited about or see as meaningful growth drivers? Nick, your microphone is

Nicholas Soziak, Chief Financial Officer, Canara Biotech: I’m sorry. I think the trifecta Perfect. I think the trifecta in Quebec is really going is going to, you know, make waves, and the trifecta outside of Quebec is making waves. So, definitely, that is super exciting as a product for me because trifecta is not just one product. It’s a format for tribal.

And once we create a format for tribal, every genetic that we launch under tribal gets that format. So, we have close to eight genetics. There’s, yeah, eight genetics. We’ll have eight trifectas over time. And as we launch 20 genetics, we’ll have 20 trifectas over time.

Porto Aleche, that’s our newest genetic coming, launching into tribal in q three. Going to be very exciting. Has, like, a cherry red wine creamy gas afternotes on it. Sports over 30% THC. We have the Wagyu Delights and the, Meat Pie coming under Nuds.

So, yeah, looking looking forward to q three and the launch that we’re doing.

Scott Carroll, Moderator, Canara Biotech: Perfect. Thank you, Nick. I see we’re coming close to time. I think we will have a a chance to answer one more question. And as mentioned in our in our press release and on today’s call, should you have any additional questions, you can definitely email us at investors@Canara.ca.

The next question, Nick, is given the continued growth and dominance in the vape segment, is Canara exploring opportunities, to expand its offerings within the vape segment?

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Absolutely. We’re we’re a big player in the vape segment. We’re gonna continue producing our five ten CARTs across tribal and NUGs, and we’ll continue doing that on a genetic every genetic that launches out. We’re gonna continue doing that. We recently launched our live resin all in one, the triple supernova, in Ontario, and our cured resins all in one under NUCs.

That’s, that’s both in Ontario and Alberta. So that’s that’s one entry into a category that we’ve never played before in. So all in ones will be a category that we’re we’re gonna build out over time. And we also are developing our solventless vape solventless vape all in one for NUCs. This is a project that, you know, we’ve been working really hard on.

It’s very important to find the right hardware because rosin, solventless rosin reacts differently than VHO live resin. There’s more, fats and lipids inside rosin, which, causes carts to clog or burn over time, and that’s been a main factor for solventless carts, which is one reason why we haven’t seen solventless carts in the market or too many of them in addition to the fact that they’re expensive to make. So we’re really trying to focus on that and bring a solventless card market that, one, quality doesn’t burn, doesn’t clog, and is most importantly affordable. So, yeah, that’s really exciting, project that we’re working on.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. I think we’re out of time. So that concludes our q and a portion. I’ll open the floor to you, Nick, for any closing remarks.

Nicholas Soziak, Chief Financial Officer, Canara Biotech: Just wanna say thank you, everyone, for taking the time to, listen to our q two earnings call and, our live q and a session. Hopefully, you got, some further insights into our business. We’re not changing our tune. We’re continuing focusing on execution of the business. We have a real opportunity in Canadian cannabis to climb the ranks and become a top leading national cannabis producer.

We have the assets, we have the people, and we have the product. So it’s just a matter of execution. Myself as well as our CEO CEO, Zohar Kururat, who be here today, worked day and night to make this happen, as well as our team of VPs and our 400 other employees, that are working day and night to make this happen. So, again, thank you for all your support in, in in our story, and, wish you a great Tuesday. Thank you, everyone.

Scott Carroll, Moderator, Canara Biotech: Thank you, Nick. Thank you all participants. Have a great day.

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