Cannara Biotech Inc.

Good morning and welcome to Canara Biotech's fiscal year Q3 financial results for the three and nine months ended May 31st, 2025. As a reminder, this presentation is being recorded. Following prepared remarks, we will conduct a question and answer session. Please submit your questions to investors at canara.ca or in the chat option in your browser. Before we begin, please refer to slide two and three of our earnings presentation. All information today It's subject to our general disclaimers on financial measures and forward-looking statements, which are available to be read in detail at cedarplus.ca. I will now turn the presentation over to Nicholas Sosiat, Chief Financial Officer at Canara Biotech.

Thank you, Scott. Good morning, everyone, and thank you for joining Canara's earning presentation for the fiscal third quarter, ended May 31st, 2025. My name is Nicholas Sosiak, CFO of Canara, and as many of you may know, I have been deeply involved in every aspect of this company since 2019. From cultivation to processing, finance, strategy, construction, sales and marketing, product development, you name it, I've had my hands in it. Today, it will be my pleasure to provide you with an update on our best quarter since the company's inception, our third quarter ending May 31, 2025. I am proud to announce that we are executing to plan steady quarter-over-quarter growth with Fisca Q3 2025 representing our strongest quarter yet, both operationally and financially. Operationally, we have achieved three very significant milestones for the business. First, we have completed our 2025 expansion strategy, turning online rooms 11 and 12 at our flagship Valleyfield facility. These new rooms will increase our annual capacity by 6,000 kg, increasing our original planned total annual cultivation capacity by nearly 18% to 39,500 kg per year. Second, through the constant research and development and refinement of our cultivation strategy, we have unlocked a significant operational breakthrough, improving our already strong annual cultivation yields by over 25% across our entire footprint. This increases the contributed capacity of our 12 activated rooms from 39,500 kilograms to 50,000 kilograms. As a result of this breakthrough, we've achieved our fiscal year 2026 cultivation target, a full year ahead of schedule. And finally, we have received approval pending financial procedural steps for the five of the 25 total vape SKUs onboarded by the SQDC for the highly anticipated vape category launch this November. This new category launched in our home province is a significant opportunity for Canara to continue our leadership as Canada's number one premium vape brand, a category where we own over 23% of national market share for the third quarter of this year. In addition to our significant operational milestones, our fiscal third quarter financial results also had some impressive milestones, with new quarterly records across almost every financial metrics. We set new quarterly records for revenue, gross profit and margin, adjusted EBITDA, operating cash flow, as well as free cash flow. During the quarter, we achieved record high net revenues of $27.3 million, up 3% quarter-for-quarter, and up 40% year-over-year. Revenue growth was driven by increased penetration within our existing markets, new product launches under our leading brands, and expanded distribution into new stores, for which we still only have captured less than 3% of available points of distribution outside of Quebec. Gross profit before fair value adjustments for the quarter reached a record high of $12.1 million, up over 11% quarter-over-quarter and up over 110% year-over-year. The increase in gross profit was generated by general economies of scale and cost efficiencies due to our automation, in addition to expanding capacity following the activation of additional grow rooms at our Violet Field facility, and of course, our yield improvement across the board. The improvement in gross profit has resulted in record gross margin before fair value adjustments of 44%, up from 41% last quarter and up from 29% in fiscal Q3 of last year. This quarter exceeded our internal gross margin target by 40%, and while we expect gross margin fluctuations on a quarterly basis, we expect to see continued positive trend in our gross margin on a forward basis as we expand to unlock further economies of scale and see the benefit of our further improved yields. We've continued to maintain strong cost controls across the organization, reporting operating expenses during the quarter of $5.6 million, representing 21% of our revenues, compared to $4.8 million, or 25% of our revenues, in the same period of prior year. We delivered record high adjusted EBITDA of $7.6 million, up over 7% quarter-for-quarter, and 170% growth versus the prior period year. This represents approximately 28% adjusted EBITDA margin, 115% basis point improvement quarter for quarter, and up from an adjusted EBITDA margin of 14% last year. Net income was $4.1 million or $0.04 per diluted share, up almost 25% quarter over quarter and up over 100% year over year. Net margin for the period was 15%, up another 12.5% in Q2 and 10% from the prior year. As you can see, solid growth across every benchmark we have. Now let's take a look at our cash flows. Operating cash flow generated was 13.9 million for the quarter, up over 220% versus the prior year period, and represented an almost 51% operating cash flow margin. The strong operational cash flows comes from our Q3 operational performance, in addition to the timing of our cash from Q2 2025, where advanced payments of excise tax and inventory purchases were made. On a year-to-date basis, which would adjust for related timing adjustments between Q2 and Q3, operating cash flow for the nine months was 17.2 million, up almost 130% year-over-year, and representing a 21% operating cash flow. Capital expenditures were $2.2 million for the quarter and $4.9 million for the nine months ended May 31st, a majority of which was spent activating cultivation space at our flagship Valleyfield facility and automation equipment for post-processing activities at Farnham. Our free cash flow generated was $11.7 million for the quarter, up over 840% from the prior year period and represented almost 43% free cash flow margin. Free cash flow generated for the nine-month period was $12.3 million versus $0.5 million in the prior year period and represented a 15.5% free cash flow margin. Fiscal Q3 2025 marks our 17th straight quarter of positive adjusted EBITDA and our fifth quarter of positive net income. Canara continues to own one of the strongest financial profiles in Canadian cannabis. Net income positive since fiscal 2021, operating cash flow positive since fiscal 2022, and free cash flow positive since fiscal 2023. For our fiscal 2025 guidance, we continue to forecast growth in both net revenue and adjusted EBITDA from our core business. We anticipate generating operating cash flow and free cash flow on an annual basis for this fiscal year. At quarter end, we held $14.4 million in cash, up $7.8 million from our prior year ending cash balance, and held a working capital position of $49.4 million. We maintain $84 million in current assets against a $34.6 million in current liabilities for a current ratio of 2.4. At quarter end, we had just shy of 91.4 million in basic shares outstanding, with less than 1.5 million shares issued over the previous 12 months and less than 3.8 million shares issued over the last three fiscal years. Basic shares issued over this period were largely as a result of employee stock option conversion plans with no dilutive capital raises conducted since the issue of our $5 million convertible facility with the Limbeck in July of 2021 for the acquisition of our Valleyfield facility. Over 50% insider ownership means Canara is led by operators with skin in the game, fully invested in building long-term value alongside our shareholders. From March to July of 2025, we executed on four milestones that strengthen our balance sheet. First, we repaid $1 million against our $5.7 million convertible debenture with Ullamback, which is maturing March 2028. A second partial repayment of $2.3 million is due in September of 2025, for which we have already found a replacement convertible debenture in place with the same terms. Second, we signed a binding letter of intent for 5.5Million dollars sale of an unutilized building and its associated land at Valleyfield, which we expect to close at the end of this month. In addition, we completed an amendment on our existing credit agreement with BMO, a leading Canadian bank, reducing our interest rate on our $34 million term loan and $10 million line of credit maturing in December of 2027 by 75 basis points, reducing our cost of debt to under 6%. Finally, we have achieved financial covenants that allowed the removal of a limited recourse guarantee on our credit facility, saving a further $375,000 in annual interest expenses. We stand strong by saying Canara maintains one of the cleanest balance sheets in Canadian cannabis, with ample cash flows to fund our expansion project and to service our debt positions and have no significant near-term maturities until December of 2027. Our market share continues to outpace peers, driven by premium quality cannabis offered at an affordable price. This is made possible by our low cost operations, scale efficiencies and access to low electricity rates in Quebec. As of June 2025, we hold a 12.6% market share in Quebec, up from 9.7% a year ago, an almost 30% increase. In March alone, we gained 60 basis points while the second largest LP lost 80 basis points. We are now just 60 basis points from the top spot. This is especially significant in Quebec and sometimes overlooked by cannabis investors as Quebec is the only province in Canada where almost no promotional activity is permitted. With no sales and marketing levers, growth here reflects product quality alone, a key signal of our ability to win across Canada. Nationally, we're the seventh largest LP, with 3.8% market share up from 3.1% last year. That's a 27% year-over-year increase, making us one of the fastest growing LPs in the country. The slight decrease in national market share from Q2 to Q3 is attributable to Ontario and Alberta, where the company saw some market share loss due to the highly competitive pricing dynamics and Canara's disciplined approach to profitable growth, prioritizing margin preservation over aggressive discounting. We are confident in our strategies in place to resume growth in market share in these markets over the coming quarters. Looking at our CPG portfolio, some examples of successes include We offer one of the fastest-growing premium-infused pre-roll multipacks in Canada. From March to June, we grew our category by 12% to 8.5% of the category share, while the number one competitor declined, now ranking us number two in Canada and number one in BC and Quebec in terms of market share. In Quebec, we hold a commanding 70% of the infused pre-roll market. Yes, I said 70% of the infused pre-roll market here in Quebec, making NUGS the undisputed leader in the province. In premium vapes, we hold over 22% national share, with sales up nearly 70% year over year, despite being one of the highest priced product lines in the category. This confirms our ability to win, not just on price, but on quality. And that same vape performance we believe will give us a strong positioning ahead of Quebec's vape launch this November. Tribal leads premium 3.5 flower segment nationally, now holding over 18% category share. With pricing at $30 in Ontario, a disruptive value versus ultra-premium offerings at $50, often with similar or less quality than Tribal. For our new investors, our market share success is built on the strong inherent competitive advantages present within our asset base. We operate two state-of-the-art mega-facilities in Quebec, enabling full vertical integration across all of our processes without the need for third-party cultivation, extraction or manufacturing. Our Farnham facility is dedicated to the operation of our nursery, our phenohunt process, post-harvest, and packaging. The facility is 650,000 square feet, of which we occupy 200,000 square feet today, and the balance of the building is currently leased out to tenants, which generate up almost $4 million a year in rental income. Our flagship valley field facility at 1.1 million square feet is a purpose built hybrid cannabis cultivation Center, it is one of the largest cultivation cannabis facilities in the country. And the largest cannabis facility here in Quebec the facility right now has 24 growing rooms each measuring 25,000 square feet. and each room is built to replicate indoor growing conditions. Our Valleyfield facility is a particular significant asset. We acquired this facility in 2021 for just $27 million. This was an extraordinary opportunity considering the incredibly over-engineered facility was built during the overspending gold rush period of Canada's initial legalization, and the facility's original construction cost exceeds $250 million. This acquisition, at a fraction of its value, has given us leading access to one of the best cultivation facilities in Canada with mass scale and low-cost cultivation. 12 of the 24 valley field rooms are activated today and operational, up from 10 rooms in fiscal of Q2. The newly activated rooms 11 and 12, after our breakthrough and cultivation improvements, will allow us to now increase our capacity to annual yields of 50,000 kilograms per year, representing a 50% increase in production since fiscal of 2024. Activating the two additional rooms required a capital investment of approximately $1.5 million. And these rooms could generate over $10 million each year in annual net revenue, making it a significant return on invested capital. And this is a strong competitive advantage that Canara owns. Canara's forward CapEx approach is rooted in disciplined growth, scaling production in line with market demand. In 2026, we will initiate the first phase of construction on a dedicated processing center at Valleyfield to support additional drying, trimming, and post-harvest capabilities. This $10 million investment will unlock processing capacity to activate additional growing zones, providing a clear path for continued scalable growth. As mentioned previously, two major operational milestones achieved during this quarter has led to a 50% increase in our production capacity since last year. For fiscal 2026, we plan to maintain our annual kilogram capacity of 50 tons while focusing on our investment capex on the build out of our phase one processing center that will allow us to scale into more cultivation rooms starting fiscal 2027 and beyond. What sets Canara apart is its ability to activate capacity within a fully, fully vertically integrated structure in lockstep with demand, delivering best-in-class returns on investment thanks to the minimal capital required to bring on our new grow rooms online. And it's important to note the benefit of having each expansion occurring in the same facility using the same team, systems, and SOPs. This drives significant operational efficiencies and margin scalability, and most importantly, consistency as we grow. Quebec has been always part of our secret sauce. It's becoming clear that licensed producers coming out of Quebec are emerging as profitable leaders. As Canada's second largest province with over 9 million people, Quebec provides us with home field advantage and access to some of the lowest utility and labour costs in Canada. One of the most compelling benefits is the province's exceptionally low electricity rates at just 5.9 cents a kilowatt, substantially lower than those in other provinces such as Alberta, where rates are as high as 14 cents a kilowatt. Since electricity and labor account for over 75% of indoor cultivation costs, our Quebec positioning gives us a significant competitive advantage within our cost base and enables us our ability to be disruptive with our pricing while still generating industry leading margins and cash flow generation. And beyond electricity costs, Quebec represents the highest barriers of entry, particularly with strict restrictions on sales and marketing. These combined factors with the lack of retail data deals makes Quebec an ideal environment for Canara's growth. 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 here profitably. They're losing market share, struggling to build brands, and failing to operate efficiently. Success in the cannabis industry is not simply rooted in scale, first mover advantage, or capital market access. And the history of overbuilt, overcapitalized companies losing market share to more sophisticated operators with better quality products is a testament to that. Success in this industry is a derivative of experience, knowledge, and most importantly, execution. While we have built large-scale success over our operational history, we view our recent operational yield improvements and upcoming vape launch in Quebec as a very strong indicator of our industry-leading operational excellence, our focus on evolving our strategies and the ability to execute. Kinara has built our success from the ground up with an extremely pragmatic, supremely focused operations team backed by leading commercial strategies and a truly premium product. Thank you for taking the time to listen to our third quarter of 2025 Financial and Operational Highlight presentation. I'd now be happy to open the floor and take your questions.

Thank you, Nick. We will now kick off our Q&A session. As a reminder, you may submit your questions via the chat or the Zoom Q&A function at the bottom of your screen. Should your questions not be answered during the call, we will follow up directly to ensure we have time to address. So Nick, thank you, Nick. So we'll start with the first question we received. So the first question is, since you managed to improve yield by 26%, why doesn't it reflect on total possible output that was previously estimated 100,000 kilograms?