Cannara Biotech Inc.

Good morning, everyone. Welcome to Canara Biotech's Q2 2026 earnings call for the three months ended February 28th, 2026. Today's presenter is Nicholas Sosiak, CFO, joined by Zohar Kriberat, founder and CEO. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephones. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. Before we begin, please refer to slide two and three for our caution regarding forward-looking statements and non-GAAP measures. I will now turn the call over to Nicholas. You may begin.

Good morning, everyone, and thank you for joining our Q2 earnings call. Q2 reflects continued execution of a model that is delivering consistent and profitable growth. For the quarter, Canara delivered 27.2 million in revenue with strong margins and profitability, generating 6 million of adjusted EBITDA and 2.9 million of operating cash flow. This represents our 20th consecutive quarter of positive adjusted EBITDA and our 14th consecutive quarter of positive operating cash flow. Despite normal seasonality, we outperformed the market, increasing retail sales and expanding market share while maintaining profitability. We increased national retail market share to 4.4% and defended our position as the number one licensed producer in Quebec, achieved in December of 2025. This performance reflects a system that is working. Our model is built on delivering premium quality cannabis at competitive price points, supported by a structurally low-cost, vertically integrated platform. That model is translating into category leadership across Tribal, NUGS, and ORCID CBD, and was externally validated this quarter through industry recognition, including Pre-Roll of the Year for Tribal Cuban Lynx Trifecta, and Concentrate of the Year for NUGS Bubble Up Hash Rosin at the National KIND Awards. In Quebec, where no marketing spend is permitted, product quality stands on its own. This was evident in the launch of the vape category, where we captured over 25% of the category share, contributing to our number one overall market share position in the province. Operationally, this is supported by a scalable, full-owned cultivation and processing assets. We are currently operating at approximately 50,000 kilograms of annualized capacity, with a clear path to 100,000 kilograms aligned with demand. As Farnham reaches full processing capacity, we are investing in a new processing centre at Valleyfield, which will expand throughput and unlock additional cultivation within our existing footprint. In parallel, we are also preparing three additional grow rooms for activation heading into fiscal 2027, representing approximately 15,000 kilograms of incremental capacity with a high ROI capital investment of approximately $1 million per room. To note, each room has the potential to generate over $10 million in annual net revenue, highlighting the strong operating leverage of our model. This allows us to scale production in a disciplined, demand-driven manner, growing revenue while maintaining margins without relying on external capital. That being said, as recently announced in February, we had the opportunity to complete a $6.3 million strategic investment with Venetian Capital at a premium of $2.10 a share. further strengthening our balance sheet to support continued investment and future growth opportunities while reinforcing investor confidence in our operations. We also enhanced our capital markets profile with our uplist to the OTCQX market in the US and subsequent graduation to the Toronto Stock Exchange in March 2026, increasing our visibility and accessibility to a broader institutional investor base. In summary, the takeaway is clear. Kinara is executing a proven, scalable model of profitable growth, combining brand leadership, cost advantage, and capital-efficient expansion. With that context, I'll walk you through the financial performance for the quarter. Results this quarter reflects both continued growth and disciplined investment in the business. On the top line, gross cannabis revenues before excise taxes increased to $37.8 million, up 3% year-over-year, driven by a 7% increase in retail revenues, offset by a decrease of $1.4 million in wholesale revenues. Total revenues increased to $27.2 million, up 2% year-over-year. This growth was supported by deeper penetration in existing markets, addition of new genetics, and continued product innovation across the portfolio. Importantly, this was achieved despite overall Canadian cannabis retail sales remaining essentially flat year over year for comparable periods, highlighting our ability to gain share in a stable market environment. From a profitability standpoint, performance remains strong. Gross profit before fair value adjustments increased to $11.6 million, up 7% year over year, with margins expanding to 43% compared to 41% in the prior year. This margin expansion was driven by improvement in cultivation yields, enhanced post-processing efficiency, and the benefits of scale across our platform. At the operating level, operating income was $3.3 million compared to $5.9 million in the prior year. This year-over-year decline reflects strategic growth investments, sales and marketing expansion, ongoing research and development, uplisting related fees, scaling our G&A, and higher non-cash share-based compensation. As a result, adjusted EBITDA was $6 million or a 22% margin compared to $7.1 million in the prior year. Net income for the quarter was $1.7 million compared to $3.3 million in Q2 of 2025. More so, we saw significant improvement in cash flow generation. Operating cash flow was $2.9 million compared to negative $2.6 million in the prior year, reflecting stronger underlying operating performance. Free cash flow was approximately negative 0.3 million compared to negative 4 million in the prior year, effectively break even despite higher capital expenditures of approximately 3.2 million compared to 1.5 million in prior year, primarily related to the valley field expansion and post-processing investments. On a sequential basis, gross cannabis revenues before excise taxes declined 10% sequentially in Q2 from 41.8 million to $37.8 million. But this was primarily driven by normal post-holiday seasonality in provincial board purchasing patterns, especially in Quebec, along with lower wholesale revenues. Importantly, this was a timing issue in board ordering, not a demand issue. In fact, our underlying consumer performance remained strong, with national retail market share increasing from 4.1% to 4.4%, estimated retail sales growing 5%, and that outperformance came during a period when the overall Canadian cannabis retail market declined 4%. Operating a net income improved quarter over quarter, reflecting strong underlying profitability while adjusted EBITDA and cash flow decreased, primarily due to normalization from a strong first quarter and additional working capital movements. Looking at year-to-date performance, the underlying trend for 2026 is clear. Gross cannabis revenues increased 11%, driven by 12% growth in retail sales, significantly outpacing the broader market, which only grew by approximately 1%. Total revenues increased to $57.3 million, also up 11% year over year. Gross profit increased 21% year to date to $25 million, with margins expanding to 44%, reflecting continued operating leverage and efficiencies across cultivation and post-processing. Year-to-date operating income came in at $6 million versus $10.1 million last year. This year-over-year change in operating income largely reflects accounting movements and intentional investment behind the business, particularly in commercial capabilities and research and development, rather than weakening in underlying operations. Adjusted EBITDA increased 14% year-to-date to $14.9 million, demonstrating the scalability of the platform despite continued investment. Operating cash flow reached $10.9 million, more than tripling compared to the prior year, while free cash flow increased to $3.1 million, even with a significant increase in capital expenditures of $7.9 million in the first six months of 2026, compared to $2.7 million in capital investment in the same period of prior year. Overall, the financial performance reflects a business that is scaling efficiently, expanding margins, generating cash flow, and investing in future growth in a disciplined manner. And even within a seasonally softer environment, we continue to take share across the market. Moving on to broader market conditions, the national retail environment experienced market softening in the quarter, reflecting normal post-holiday consumer seasonality with total estimated Canadian retail sales declining approximately 4% quarter over quarter. Despite that backdrop, Kitnara continued to grow. Our estimated national retail sales increased to approximately 55.7 million in Q2, up 2.7 million, or 5% quarter over quarter, reflecting continued strength across our core markets and product categories. What's particularly notable is our relative performance. Among Canada's top 10 licensed producers, Kinara was one of the few scaled operators to deliver positive sequential growth, while the majority of our peers experienced declines. In a seasonally softer market environment, Kinara is not just holding share, we are taking share. This outperformance is being driven by the strength of our branded portfolio, continued innovation in genetics and product formats, and disciplined execution across cultivation, production, and distribution. At the national level, Canara's estimated retail market share increased to 4.4% in Q2, up from 4.1% in Q1, and continuing to trend higher year over year. In Quebec, which has now surpassed British Columbia to become Canada's third largest cannabis retail market following the launch of the vape category, we further extended our leadership, reaching approximately 14.3% market share in Q2, and maintaining our position as the number one licensed producer by retail sales. Beyond Quebec, we are seeing continued momentum across multiple provinces, including British Columbia, Saskatchewan, and Manitoba, highlighting the strength and portability of our model. In Ontario, while share remains stable through Q2, we are already seeing early signs of acceleration into Q3, with market share increasing to approximately 3.7% in March of 2026. This momentum is being supported by the performance of recent product launches, including NUGS Flavour Balm, which has consistently ranked among the top three infused pre-roll products by wholesale sales dollar in Ontario since launch. We expect to continue expanding the Flavour Balm sub-brand through fiscal 2026, supporting further growth in the high-margin infused pre-roll category. Overall, these gains are being achieved within a seasonally softer market environment, reinforcing our ability to consistently take share through discipline execution, product innovation, and strong brand performance. That strength across provinces is being driven by the depth and performance of our product portfolio. Across NUGS, Tribal, and ORCID, we've established leadership positions across multiple key categories, including infused pre-rolls, hash rosin, live resin vapes, and CBD flower. Importantly, this leadership is not dependent on a single product or category. It is diversified across formats, price points, and consumer segments, allowing us to consistently capture demand across the market. At the core of this is our innovation engine. Through our in-house genetics program, we screen hundreds of phenotypes annually to identify high-performing cultivars with strong yield, potency, and differentiated terbine profiles. To bolster our brands and product leadership, this quarter, we have a number of exciting new launches. Under flower, we have launched two new cultivars, Gran Turismo under Tribal, and Florida Oranges under Nugs, with additional launches planned, including CBD Jean Guy under Orchid. For Live Resin and Rosin, in addition to our successful vape launch in Quebec, we have one new all-in-one, the Bubble Up Supernova, that hit the market in addition to the planned launch Gran Turismo Live Resin 510 vape cartridge in the coming weeks. Last, but not certainly least, we are very proud of our launch of the Nugs Flavor Balm sub-brand to capture the growing demand for high-potency liquid diamond products. In mid-December, we kicked off the launch with a five-pack of infused pre-rolls that has quickly reached and maintained a top three position in Ontario. We will be extending this product line further over the coming months as we expand across Canada and will also be launching in the vape category with exciting flavors in 510 vape cartridges and all-in-ones. This continuous pipeline of innovation allows us to stay ahead of consumer preferences and sustain our leadership across categories. And with that demand now building across the portfolio, we are well positioned to scale that success as we expand lockstep with production capacity. Let me walk you through our balance sheet, which reflects the financial foundation we built to support our next phase of growth. Starting with cash, we ended the quarter with $21.9 million, up $7.5 million from $14.4 million at August 31, 2025. This improvement reflects strong operational cash generation and the recent capital raise with Venetian Capital while maintaining a disciplined working capital strategy. Working capital increased to $61.3 million, up $13.3 million from $48 million at the start of the fiscal year. That figure is composed of $21.9 million of cash, $69.2 million in receivables, biological assets and inventory and other current assets, offset by $20.7 million in accounts payable and accrued liabilities and $9.1 million in current debt obligations, the latter down $4.3 million from the start of the fiscal year, reflecting meaningful progress in reducing near-term obligations. Accounts receivable came in at $12.5 million, down $1.6 million from the start of the year in line with slight decrease in sales, but demonstrating healthy collection activities during the period. Inventory increased to $48.6 million, up $4.1 million since year-end, driven by higher production at Valleyfield. This is a deliberate build to support future growth, not a demand concern. We have been preparing inventory ahead of expected sales expansion, and as that volume moves through the system over the remainder of 2026, we expect the balance to convert into revenue and normalize. Biological assets were $5.5 million, reflecting the value of cannabis currently in production. Together, these two line items reflect the underlying value being created in our growing and production operations. Properly, plant and equipment came in at $89.7 million, up $4 million, a direct reflection of our ongoing capital investment into the Valleyfield facility. Total assets grew to $181.8 million, up $13.2 million from $168.6 million as of August 31, 2025. Liabilities remained well-controlled. Current liabilities decreased by $4.4 million to $29.8 million, and non-current liabilities were essentially flat at $31.8 million. As a result, net assets increased by $18 million to $120.2 million, a strong and growing equity base. On the financing side, we maintain access to a revolving credit facility for working capital purposes. As of quarter end, the weighted average rate was 5.29%, and subsequent to quarter end, all tranches were renewed for 90-day terms at a more favorable interest rate of 4.89%. We also hold a $5.1 million letter of credit to cover deposit requirements with a provincial supplier at Valleyfield. which is expected to gradually decrease as electricity is consumed over time. From a capital markets perspective, over 30-day average market capitalization is approximately $180.7 million based on an average share price of $1.83 and approximately 97.8 million shares outstanding. Taken together, this is a balance sheet built for growth, liquid, well-capitalized, and with liabilities that are stable and manageable. Before we open the line for questions, let me bring it all together. Canara is executing a focused and disciplined model, and it's delivering results. We are consistently gaining market share across provinces, driven by a portfolio of leading brands, strong product innovation, and a clear price to quality advantage. At the same time, we are converting that growth into profitability and cash flow, while scaling our platform in a capital efficient and demand driven manner. Our vertically integrated model gives us control over quality, consistency, and cost, allowing us to compete effectively and continue taking share even in a competitive and evolving market. Importantly, we are doing this from a position of financial strength, with the ability to fund our growth internally while maintaining a disciplined approach to capital allocation. The result is a business that is growing, profitable, and structurally advantaged. With a clear path to expand capacity, increase distribution, and deepen our leadership across key categories, we see a significant runway ahead. In short, Canary is a scalable, cash-generating platform with a proven model to keep compounding profitably in line with demand. Thank you for your continued support. We will now open the line for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. And our first question will come from the line of Nicholas Cordeluzzi of Atrium Research. Your line is open, Nicholas.