Cannara Biotech Inc. (LOVE) Earnings Call Transcript & Summary

Hello, everyone, and good morning. Thank you for joining us for Cannara Biotech's Q2 2026 earnings call, covering the three months that ended February 28th, 2026. Nicholas Sosiak, our CFO, is the presenter today, and he's joined by Zohar Krivorot, our Founder and CEO. Right now, every participant is in a listen-only mode. Once the speaker's presentation concludes, we'll open things up for a question-and-answer session. If you'd like to ask something during that session, press star one one on your telephone. An automated message will then confirm that your hand is raised. Should you wish to withdraw your question, just press star one one once more. Please be aware that today's conference is being recorded. Before we get started, we'd ask you to look at slides two and three, which set out our caution regarding forward-looking statements and non-GAAP measures. I'll now hand the call over to Nicholas. You may begin.

Good morning, everyone, and thanks for being with us on our Q2 earnings call. The second quarter shows us continuing to carry out a model that produces steady, profitable growth. During the quarter, Cannara brought in 27.2 million in revenue with strong margins and profitability, producing 6 million of adjusted EBITDA and 2.9 million of operating cash flow. That marks our 20th quarter in a row of positive adjusted EBITDA and our 14th straight quarter of positive operating cash flow. Even with normal seasonality, we beat the market, raising retail sales and growing market share while keeping profitability intact. We lifted our national retail market share to 4.4% and held our spot as the top licensed producer in Quebec, a position reached in December of 2025. These results show a system that works. Our model rests on offering premium quality cannabis at competitive price points, backed by a vertically integrated platform with structurally low costs. That approach is turning into category leadership across Tribal, Nugz, and Orchid CBD, and it received external validation this quarter through industry recognition, including Pre-Roll of the Year for Tribal Cuban Linx Trifecta and Concentrate of the Year for Nugz Bubble Up Hash Rosin at the National Kind Awards. In Quebec, where no marketing spend is allowed, product quality speaks for itself.

We saw this clearly when we launched the vape category: we took more than 25% of category share, which helped us reach the number one overall market share position in the province. On the operational side, this is backed by scalable cultivation and processing assets that we fully own. At present we run at roughly 50,000 kilograms of annualized capacity, with a clear path to 100,000 kilograms in line with demand. As Farnham reaches full processing capacity, we are putting investment into a new processing center at Valleyfield, which will expand throughput and unlock additional cultivation within our existing footprint. At the same time, we are getting three additional grow rooms ready 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. It is worth noting that each room has the potential to generate over $10 million in annual net revenue, which highlights the strong operating leverage of our model. This lets us scale production in a disciplined, demand-driven manner, growing revenue while maintaining margins without relying on external capital. That said, as we announced recently in February, we had the opportunity to complete a 6.3 million strategic investment with Phoenician 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 likewise strengthened our capital markets presence by moving up to the OTCQX market in the U.S., followed by our graduation to the Toronto Stock Exchange in March 2026, which has boosted our visibility and made us more accessible to a wider institutional investor base. To sum up, the message is straightforward: Cannara is carrying out a proven, scalable model of profitable growth, bringing together brand leadership, cost advantage, and capital-efficient expansion. Against that backdrop, I'll take you through the financial results for the quarter. This quarter's performance shows both ongoing growth and disciplined investment in the business. At the top line, gross cannabis revenues before excise taxes rose to 37.8 million, an increase of 3% year-over-year, powered by a 7% rise in retail revenues that was partly offset by a 1.4 million decline in wholesale revenues. Total revenues grew to 27.2 million, up 2% year-over-year. That growth came from deeper penetration in existing markets, the addition of new genetics, and ongoing product innovation across the portfolio. Importantly, we achieved this even though overall Canadian cannabis retail sales stayed essentially flat year-over-year for comparable periods, which underscores our capacity to gain share in a stable market environment. On the profitability side, performance stayed strong. Gross profit before fair value adjustments climbed to 11.6 million, up 7% year-over-year, as margins expanded to 43% from 41% in the prior year.

That margin gain came from better cultivation yields, more efficient post-processing, and the advantages of scale throughout our platform. On the operating line, operating income came in at 3.3 million versus 5.9 million a year earlier. The year-over-year drop reflects investments in strategic growth, expansion of sales and marketing, continued research and development, fees tied to our uplisting, scaling of G&A, and greater non-cash share-based compensation. Consequently, adjusted EBITDA reached 6 million, a 22% margin, versus 7.1 million in the prior year. Net income for the quarter totaled 1.7 million versus 3.3 million in Q2 of 2025. In addition, cash flow generation improved substantially. Operating cash flow was 2.9 million versus -2.6 million a year earlier, reflecting stronger underlying operating performance. Free cash flow came to roughly -$0.3 million versus -$4 million in the prior year, essentially break-even even with capital expenditures of approximately 3.2 million, up from 1.5 million in the prior year, mainly tied to the Valleyfield expansion and investments in post-processing. Sequentially, gross cannabis revenues before excise taxes fell 10% in Q2, from 41.8 million to 37.8 million, though this largely stemmed from normal post-holiday seasonality in provincial board purchasing patterns, particularly in Quebec, together with lower wholesale revenues.

The key point here is that this was about timing in how the board placed orders, not about demand. As a matter of fact, our consumer performance underneath stayed robust: national retail market share rose from 4.1% to 4.4%, estimated retail sales were up 5%, and we delivered that outperformance in a stretch when the Canadian cannabis retail market as a whole fell 4%. Operating and net income both improved from one quarter to the next, which speaks to solid underlying profitability, whereas adjusted EBITDA and cash flow came down, mainly because of normalization following a robust first quarter plus extra working capital movements. Turning to year-to-date performance, the underlying trend for 2026 is evident. Gross cannabis revenues climbed 11%, powered by 12% growth in retail sales, which far outpaced the wider market that grew only about 1%. Total revenues rose to 57.3 million, again up 11% year-over-year. Gross profit was up 21% year-to-date to 25 million, and margins widened to 44%, which reflects sustained operating leverage and efficiencies in cultivation and post-processing. Year-to-date operating income landed at 6 million, compared with 10.1 million last year. That year-over-year swing in operating income mostly comes from accounting movements and deliberate investment behind the business—especially in commercial capabilities and research and development—rather than any softening in underlying operations. Adjusted EBITDA rose 14% year-to-date to 14.9 million, which shows how scalable the platform is even with continued investment.

Operating cash flow came in at 10.9 million, which is more than triple what it was a year earlier, and free cash flow rose to 3.1 million, and that held true even with capital expenditures climbing substantially to 7.9 million during the first six months of 2026, versus 2.7 million invested in capital in the comparable stretch of the previous year. Taken together, these results show a company scaling up efficiently, widening margins, producing cash flow, and putting money into future growth with discipline. Even in an environment that is softer due to seasonality, we keep gaining share throughout the market. Turning to wider market conditions, the national retail landscape saw softening during the quarter, which mirrors the usual post-holiday pattern in consumer seasonality, and total estimated Canadian retail sales fell by roughly 4% from one quarter to the next. Even against that background, Cannara kept growing. Our estimated national retail sales climbed to about 55.7 million in Q2, an increase of 2.7 million, or 5%, quarter-over-quarter, which speaks to ongoing strength in our core markets and product categories. What stands out especially is how we performed relative to others. Of Canada's top 10 licensed producers, Cannara was among the few scaled operators to post positive sequential growth, whereas most of our peers saw declines. In a market environment that is softer seasonally, Cannara isn't merely keeping its share; we are gaining share.

That outperformance comes from how strong our branded portfolio is, ongoing innovation in genetics and product formats, plus disciplined execution spanning cultivation, production, and distribution. Nationally, Cannara's estimated retail share of the market rose to 4.4% in Q2, compared with 4.1% in Q1, and it keeps climbing on a year-over-year basis. In Quebec — which, after the vape category launched, has now moved past British Columbia to rank as Canada's third-largest cannabis retail market — we widened our lead further, hitting roughly 14.3% market share in Q2 and holding our spot as the top licensed producer by retail sales. Outside Quebec, momentum keeps building in several provinces, among them British Columbia, Saskatchewan, and Manitoba, which shows how strong and portable our model is. In Ontario, share held steady during Q2, yet we already see early signals of acceleration as we move into Q3, with market share rising to about 3.7% in March of 2026. Recent product launches are fueling that momentum, among them Nugz Flavor Bomb, which since launching has consistently placed within the top three infused pre-roll products by wholesale sales dollar in Ontario. Through fiscal 2026, we plan to keep growing the Flavor Bomb sub-brand, which will support additional growth in the high-margin infused pre-roll category.

Broadly speaking, we're delivering these improvements in a market that's softer on a seasonal basis, which underscores our capacity to reliably gain share via disciplined execution, product innovation, and strong brand performance. The depth and performance of our product portfolio is what powers that strength across provinces. With Nugz, Tribal, and Orchid, we've built leadership positions in several key categories, among them infused pre-rolls, hash rosin, live resin vapes, and CBD flower. Crucially, that leadership doesn't rest on one product or category. It's diversified across formats, price points, and consumer segments, which lets us reliably capture demand throughout the market. Our innovation engine sits at the heart of this. With our in-house genetics program, we screen hundreds of phenotypes each year to find high-performing cultivars that offer strong yields, potency, and differentiated terpene profiles. To strengthen our brands and product leadership this quarter, we have several exciting new launches. Within flower, we've introduced two new cultivars: Grand Turismo under Tribal and Florida Oranges under Nugz, with more launches planned, among them CBD Jean Guy under Orchid. On the live resin and rosin side, beyond our successful vape launch in Quebec, we have one new all-in-one, the Bubble Up Supernova, that reached the market, along with the planned launch of the Grand Turismo live resin 510 vape cartridge in the coming weeks.

Finally — and certainly not least — we take a lot of pride in having launched Nugz Flavor Bomb, our sub-brand created to meet rising demand for high-potency liquid diamond products. We began the rollout in mid-December with a 5-pack of infused pre-rolls, and it climbed quickly into a top three spot in Ontario, where it has stayed. Over the months ahead, this line will be broadened as we move into more of Canada, and we'll also enter the vape segment with exciting flavors in 510 vape cartridges and all-in-ones. Because innovation keeps flowing like this, we remain ahead of what consumers want and hold our leadership position across categories. Now that demand is building throughout the portfolio, we're well positioned to scale that success as we grow in lockstep with production capacity. Let me take you through the balance sheet, which shows the financial foundation we've established to support our next phase of growth. Beginning with cash, we finished the quarter at 21.9 million, which is 7.5 million higher than the 14.4 million we had at August 31st, 2025. That gain reflects robust cash generation from operations and the recent capital raise with Phoenician Capital, all while keeping a disciplined working capital strategy. Working capital rose to 61.3 million, an increase of 13.3 million over the 48 million at the beginning of the fiscal year.

This amount breaks down into 21.9 million in cash plus 69.2 million across receivables, biological assets, inventory, and other current assets, reduced by 20.7 million of accounts payable and accrued liabilities along with 9.1 million in current debt obligations — and that last item is 4.3 million lower than where the fiscal year began, which shows real progress on trimming near-term obligations. Accounts receivable stood at 12.5 million, a drop of 1.6 million since the year started, consistent with a modest sales decline while also showing solid collection efforts in the period. Inventory rose to 48.6 million, 4.1 million higher than year-end, pushed up by increased output at Valleyfield. That build is intentional, meant to support future growth rather than signal any demand weakness. We've been stocking up in anticipation of sales expansion, and as that volume flows through the system over the rest of 2026, we expect the balance to turn into revenue and return to normal. Biological assets totaled 5.5 million, representing the value of cannabis currently being grown. Taken together, those two line items capture the underlying value our growing and production operations are creating. Property, plant, and equipment reached 89.7 million, an increase of 4 million, directly reflecting the capital investment we continue making in the Valleyfield facility.

Our total assets rose to 181.8 million, which is an increase of 13.2 million compared with 168.6 million as of August 31st, 2025. Liabilities stayed under good control. Current liabilities fell by 4.4 million, landing at 29.8 million, while non-current liabilities were basically unchanged at 31.8 million. Consequently, net assets climbed by 18 million to 120.2 million — a solid equity base that keeps expanding. Turning to financing, we continue to have access to a revolving credit facility that supports working capital needs. At the close of the quarter, the weighted average rate stood at 5.29%, and after quarter-end, every tranche was renewed on 90-day terms at a more attractive interest rate of 4.89%. We also carry a 5.1 million letter of credit covering deposit requirements with a provincial supplier located at Valleyfield, and that amount should decline gradually as electricity gets consumed over time. Looking at capital markets, our 30-day average market capitalization comes to roughly 180.7 million, calculated on an average share price of $1.83 and about 97.8 million shares outstanding. All of this adds up to a balance sheet designed for growth: liquid, well-capitalized, and carrying liabilities that are both stable and manageable. Before we open the line for questions, allow me to pull everything together. Cannara is running a focused, disciplined model, and that model is producing results.

Across every province, our market share keeps climbing, and that comes from a portfolio of leading brands, solid product innovation, and a clear edge in price versus quality. At the same time, we're turning that growth into profit and cash flow, while we scale the platform in a way that's capital-efficient and driven by demand. Because our model is vertically integrated, we control quality, consistency, and cost, which lets us compete effectively and keep taking share even as the market stays competitive and keeps evolving. Importantly, we're doing this from a position of financial strength, with the ability to fund our growth internally while keeping 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, Cannara 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. Just a reminder that if you'd like to ask a question, you should press star one one on your phone and then wait for your name to be called. If you want to take your question back, press star one one once more. Please hold while we put together our Q&A roster. Our first question is from Nicholas Cortellucci at Atrium Research. Your line is open, Nicholas.

Hi Nick, hi Zohar. Thanks for taking my questions. The first thing I wanted to ask about was whether you could give us a bit more color on how the provinces performed. What did you do right in some of those provinces where you gained share?

On the Quebec piece, absolutely — I think we did really well there from Q1 into Q2 thanks to the vape launch. Since the vape launch came near the end of Q1, in November, a lot of product got pushed into Quebec ahead of time, and that's the reason sales came in somewhat front loaded during Q1 and then into Q2. Like any launch, you get an initial spike, and after that it settles down, and we're quite pleased with where it has settled, at 25% of the category. Overall that's roughly an 8% lift to Quebec's sales, which moves them up to the third-largest province. In my view, they executed the vape launch very well. This quarter was also fairly quiet for us on the innovation side. Not many launches beyond a couple of all-in-ones and two or three SKUs. The bulk of our SKUs launch in March, April, and June of this year, and we expect that to show up in the second quarter.

Understood, thanks. Perhaps looking at it through the lens of product format, which areas are showing growth, and what is constraining you?

There's something worth noting about our position: we haven't had a meaningful presence in the 28-gram or large formats, nor in the 14-gram packs or the 7-gram packs. Tribal has stayed entirely within 3 and 1/2 and earned the number one spot in mass premium purely on the strength of the 3 and 1/2s. As for bigger formats, 14 grams is arriving in Q3 under Tribal — three of our cultivars will launch in 14 grams, and those carry a substantial volume lift versus where we stand with the 3 and 1/2s. That's what we're aiming for next quarter, along with growth of our Flavor Bomb line. On the infused side, we offer a 5-pack multi-pack. We're bringing out a 3-pack single flavor too, plus a 1-gram 60% Flavor Bomb. Those Flavor Bomb flavors are also coming in 510 cartridges and liquid diamonds, and in all-in-ones as well.

Thanks, I appreciate that. Then the last thing was just whether you could give us a bit more detail on the construction update. What has been finished so far, and what is on the schedule for Q3?

At the moment, the support building is going up — every bit of concrete has been poured — and we're finalizing the EU GMP architect drawing. After that's finished, we'll break ground on putting up the walls and all the rest of what's needed so the support building gets EU GMP certified. So far, the concrete work, the fumigation, and a substantial share of the electrical work are complete. The moment the architectural drawing gets the green light, we can start building out our timeline through December 2026.

Great. All right, that's everything from my side. Appreciate you taking my questions, everyone.

I appreciate that.

Thanks, Nick.

We’ll take our next question from Ryan Neal at TD Cowen. Your line is open.

Hi everyone, Ryan here filling in for Derek, and I appreciate you taking my questions. Perhaps we can begin with a quick one regarding SG&A and the run rate there. EBITDA came under some pressure from the elevated opex, as we saw. Could you quantify the SG&A increase this quarter in some way, and also how much of it is recurring as opposed to one-time, and perhaps give us a sense of what that could look like as a percentage of sales going forward?