Cannara Biotech Inc.

everyone and welcome to canara biotech's fiscal year q2 earnings presentation for the three and six months ended february 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 prepared remarks we will conduct a question and answer session if you haven't already done so you may submit your questions to investors canara.ca or in the chat option in your conference browser. Should all submitted questions be addressed today, we will follow up accordingly via email. 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 cdarplus.ca. I will now turn over the call to Nicholas Sosiak, Chief Financial Officer.

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. Kinara 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 1.6 million 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 2025. Fully scaled, our platform has the 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 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 platforms 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 2025 represented the strongest quarter in Canaris history. We delivered record revenue, record gross profit and gross margin, and record operating income and record adjusted EBITDA. During the quarter, we achieved net revenues of 26.6 million, up 6% quarter-over-quarter, and 35% year-over-year. We reported record high gross profit before fair value adjustments of 10.8 million, up almost 11% quarter-over-quarter, and returning us to previous record high gross margin of 41%. We also delivered an adjusted EBITDA of 7.1 million, up 18% quarter over quarter, and representing over 100% year over year growth. This represents a 27% adjusted EBITDA margin, a 280 basis point improvement, and an almost 900 basis point improvement versus the prior year period. This marks our 16th 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 2021, operating cashflow positive on an annual basis since 2022, and free cashflow 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 phenohunting 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 2027. 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 million 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 2025, we hold third market position in Quebec, with 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. Canary 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 is 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 7th 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 7 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 flour, priced at only $30.08 in Ontario, but maintaining consistency, flavor, nose, and freshness comparable with ultra-premium-priced flour offerings, priced upwards to over $50 a unit. This value proposition has allowed Tribal to capture number one nationwide share of premium 3.5 gram flour, 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 12 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 providing the highest quality option available in that category. This leadership in the premium vape category is also a strong potential indicator of future performance once our home province of Quebec opens up the vape market in November of 2025. We are the fastest growing infused pre-roll multi-pack in Canada as well, with number two nationwide share of the category. From December 2024 to April of 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 farmland facility is dedicated to the operation of the nursery, our phenohunt process, post-harvest process, and packaging. The facility is 625,000 square feet, of which we occupy 170,000 square feet today. The balance of the building is currently being leased out to two tenants, which generate up almost $4 million a year in rental income. Our Valleyfield facility at 1.1 million square feet is a purpose built for hybrid indoor cannabis cultivation. It is one of the largest cannabis 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 2025 objective of activating two more rooms with one being turned online in April and an additional one scheduled next month, May 2025. 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 million. This was an extraordinary opportunity, considering the incredibly over-engineered facility was built during the overspending gold rush period of Canadian's initial legalization, and the facility's original construction costs exceed over $250 million. 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 2026 and beyond. The remaining 12 rooms of Valleyfield facility will be turned online over the next 36 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 million in capex to activate, and we project the capital return period within the first year of operations. Fully scaling Valleyfield can enable us to generate between $250 million to $300 million in net revenue, assuming our current market conditions hold. As Canada's second largest province with over 9 million 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 cents a kilowatt, substantially lower than those in other provinces such as Alberta, where rates as high as 13.6 cents a kilowatt. To our benefit, our Valleyfield facility pays a further reduced rate of 3.7 cents 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 a 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 fee cash flow. We have a clean balance sheet and with manageable debt profile and nearly industry low interest rates. During the quarter, we achieved record high gross revenue of 37.7 million and net revenues of 26.6 million, 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 $10.8 million, returning us to our previous record high gross margin of 41%, representing a 170 basis point improvement quarter-over-quarter and a 370 basis point improvement versus the prior year period. The increase reflects increased yields, cost efficiencies, and a larger portion of our revenue coming from higher margin products such as live resin and dried flour. 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 $6.1 million, representing under 23% of our revenue. This reflects positively against the previous quarter and the prior year period, where operating expenses represented over 24% and 31% 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 the upcoming Quebec vape launch in November. We delivered a record high adjusted EBITDA of 7.1 million, up 18% quarter over quarter, and representing over 100% year over year growth. This represents a 27% adjusted EBITDA margin for the quarter, a 280 basis point improvement, and an almost 900 basis point improvement over the prior year period. Operating cash flows for Q2 was an outflow of 2.6 million, bringing year-to-date cash flow to a positive 3.3 million. Q2 free cash flow came in at an outflow of 4 million, bringing our year-to-date free cash flow to 0.6 million. This quarter, our operating cash flow, which in turn reduced our free cash flow, was a result of prepaying our excise tax obligations of $3.5 million before the end of the quarter and before the actual cash was collected from our related receivables. In addition to investing over $1.5 million in advanced deposits for packaging materials sourced overseas to reduce our costs and stock outs in fiscal 2025. We generated net income of 3.3 million and an EPS of 0.4 cents per share for Q2 of 43% quarter over quarter. Net margin for the period was 12.5% versus 9.2% for the prior quarter. During the quarter, we also made significant effort to further strengthen our balance sheet. In February, we announced the extension of our $34 million BMO credit facility to December of 2027, while maintaining our floating interest rate, which is currently below 7%. We also extended our smaller $5.7 million convertible venture to March 2028. For fiscal 2025 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 fee 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. Kinara 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 for our leading 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 the 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.

So thank you, Nick. We'll now transition over to our Q&A portion of the earnings presentation. Thank you.