Scott Carroll: Good morning, everyone, and welcome to Cannara Biotech’s Fiscal Year Q2 Earnings Presentation for the three and six months ended February 28th, 2025. My name is Scott Carroll, and I'll 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 investors@cannara.ca or in the chat option in your conference browser. If all your submitted questions be not addressed today, we will follow up accordingly via email. Before we begin, please refer to Slides 2 and 3 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.ca. I'll now turn over the call to Nicholas Sosiak, Chief Financial Officer.
Nicholas Sosiak : Good morning, everyone. Thank you again for joining our Q2 earnings webcast. My name is Nicholas Sosiak, and as CFO of Cannara 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 Cannara for being one of Canada's largest vertically integrated cannabis producers, driven by strong financials, innovation, and a consumer first approach. What truly gives Cannara 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. Cannara 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 Cannara's 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 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, flavourful high cannabinoid strain profiles, and sophisticated cultivation methods such as hand drying, hand trimming, and slow carrying 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 Cannara 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'll 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 CAD 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 and 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 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. Cannara 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 CAD 30.8 in Ontario, but maintaining consistency, flavour, nodes and freshness comparable with ultra-premium priced flower offerings priced upwards to over CAD 50 a unit. This value proposition has allowed Tribal to capture number one nationwide share 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 being -- 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 CAD 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. Cannara 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-hunting 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 to almost CAD 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 are happy to report achieving our 2025 objective of activating two more rooms with one being on 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 CAD 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 CAD 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 pheno-hunt 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'll 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. Next one being activated in May, costs approximately CAD 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 CAD 250 million to CAD 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 labour costs in Canada. One of the most compelling benefits is the province's exceptionally low electricity rate at just CAD 5.03 a kilowatt, substantially lower than those in other provinces, such as Alberta, where rates as high as CAD 13.60 a kilowatt. To our benefit, our Valleyfield facility pays a further reduced rate of CAD 3.07 a kilowatt due to its location in a preferred agricultural development zone. Since electricity and labour costs account for over 75% of our indoor cultivation expenses, our Quebec positioning gives 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, particular with strict restrictions on sales and marketing. These combined factors combined with the lack of retail data deals make Quebec an ideal environment for Cannara's growth. Cannara Biotech stands out as one of the Canada's most profitable cannabis producers. We have 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 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 the 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 CAD 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%, 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 CAD 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 CAD 2.6 million, bringing year-to-date cash flow to a positive CAD 3.3 million. Q2 free cash flow came in at an outflow of CAD 4 million, bringing our year-to-date free cash flow to CAD 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 CAD 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 CAD 1.5 billion in advance deposits for packaging material sourced overseas to reduce our cost and stockouts in fiscal 2025. We generated net income of CAD 3.3 million and an EPS of CAD 0.04 per share for Q2, up 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 a significant effort to further strengthen our balance sheet. In February, we announced the extension of our CAD 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 CAD 5.7 million convertible debenture 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 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. Cannara 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 future of Canadian cannabis. Thank you for taking the time to learn more about Cannara. We'd now be happy to open the floor and take your questions.
A - Scott Carroll : So thank you Nick. We'll now transition over to our Q&A portion of the earnings presentation. Nick, on your side is your mic now unmuted?
Nicholas Sosiak : Yes, just the video is not working.
Scott Carroll : Just one second here.
Nicholas Sosiak : Alright, I think we got it.
Scott Carroll : Perfect. So as mentioned in our press release, we received questions to our investors@cannara.ca 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 you've spoken previously to an internal goal for number one Quebec market share, your closing greening ground. Are there any specific catalysts that could push you to number one in Quebec?
Nicholas Sosiak : Yes, 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 the reason why we're outperforming here in Quebec, and I think that's just going to continue to escalate as 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 uses live resin, genetic specific live resin. So we take our genetics, such as the Quebec links, and we create live resin from it, and then we infuse the sauce inside the flour, 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 the coming quarter. We're also launching a new genetic, our meat pie and our porto leche. So that's exciting, and, yes, vapes are coming in November for Quebec, which is a totally brand new category, and that, as you all know, we're one of the largest producer of live resin vapes in the country. So having -- bringing this product here in Quebec is extremely, we're very confident that our product is going to take traction and take a really good portion of the upcoming vape category here in Quebec.
Scott Carroll: Yeah. It's perfect. Thank you. The next question, looking back towards Q2, were there any standout product successes or key highlights across your portfolio that you could expand on?
Nicholas Sosiak: Yeah. Our recent genetics, Neon Sunshine and Bubble Up, again, we took almost a year and a half to pheno hunt those genetics, so, and that goes across all our genetics going forward. It's a year and a half year plus a couple of months to really get a genetic to market. So the Neon Sunshine and the Bubble Up are showing the fruits of our labor. They're just they're catching up right under Cuban links and Cuban links, FinoHunted almost four and a half years ago is still outpacing the holding place as number one genetic in our Tribal portfolio but Neon Sunshine and Bubble Up are taking second and third. So that's just a matter of time where those two genetics 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 Tribal. Beyond that, we're the trifecta from Tribal, we're really excited to see it launch in Quebec, but it's already in Ontario. We're launching in BC and, bringing it into Alberta as well. It really has grown into the fastest-growing mass premium multi-pack infused pre-roll. We put a lot of innovation work, and just the manufacturing process is so technical and labour-intensive, to get it right, but we feel like we mastered that, and again, the trifecta commands a CAD 10 price point higher than our competitors. So this is a clear sign of Tribal's brand strength and consumer demand and the fact that we can play, we're usually priced in that medium priced here, but there are 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 premium pricing. So, first is our focus on building Tribal as a trendsetting house of genetics and then the really what we're proud of is our vertical integration. We're creating all our flower. We're growing all the flower. We're creating all the BHO. We're creating all the key for doing all the THC diamonds all in-house, so we really get to control the quality of the inputs, and that's what we put into our product, and that's what's succeeding this quarter. So Neon Sunshine, Bubble Up, our trifectas, our infused pre-rolls, our vapes, they're all seeing quarter-over-quarter increases.
Scott Carroll: Perfect. Thank you. We received a question from our 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 CAD 50 at what point in the growth profile may you consider pricing as a way to drive margin improvements?
Nicholas Sosiak: Yeah. Again, we 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 yield. As we're genetic house, so for -- we're investing all of the money and resources and finding genetics for an unforeseeable amount of time to really build a roster of genetics. These roster genetics will have the THC, have the flavours that we're all looking for, that the market wants, but most importantly, have high yields. Right now, our average, we started some genetics at 60 grams per plant. Now our average is around 85 grams per plant, and we have some plants that are growing over a 100 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 between where the volume drops off significantly, if you try to price your eights or any products in the premium range. So really, we're trying to capture volume. We have a 100,000 kilos to sell. So pricing, we're extremely proud about our pricing and being affordable and giving quality products in that -- in the mass segment of price point that most people buy in and that's what's really going to take over the market and scale our brands to number one. Furthermore, just cost savings as we grow more weed our fixed costs don't increase. It costs us CAD 700,000 to turn on a room, and five people to turn on the room, and we can generate over 3,000 kilos that year. So our fixed costs will stay the same, but then we're producing more and generating more revenues. So we're going to see efficiencies and margin increases there and 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 scale our business and not price. If we do price, it would probably in another brand, a segmented brand that we would create, and it would have other characteristics that would justify the increase in price.
Scott Carroll : Thank you, Nick. We received 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 approximately 10% rate?
Nicholas Sosiak : Yes, great question. The asset held for sale is anything could happen in real estate, but we are -- we do have potential interested parties. We're confident that a trans that we might see a transaction very soon. So that's definitely 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 12-24 is we have to build out a processing building. And that's a CAD 7 million 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, 1.5. So we're going to utilize that cash from the sale of the building to continue investing into Valleyfield and opening more Growrooms. In terms of reducing our interest rate on that convertible venture, absolutely, it's an open-ended convertible venture, so we can pay it down anytime. The objective, we make way more ROI on taking the cash and investing it into the grow rooms to produce more cannabis and at the point that we do have excess cash flow 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: 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 Sosiak: The team is working every day on process improvement. 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 build from day one that 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 a certain point with all without affecting quality. In our pre-roll department, we're purchasing more machines, we're scaling up 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 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 our supply chain to really stream line the supply of our packaging and cost efficiencies on that point.
Scott Carroll: Thank you, Nick. Next question received by email. Can you provide some colour on the factors that contributed to the quarter-over-quarter market share decline observed in Saskatchewan and Manitoba this past quarter?
Nicholas Sosiak: Yeah. So we'll start with Saskatchewan. The first one is that we transitioned to a new wholesale partner during Q2. 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, 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 Manitoba, and Nova Scotia are ancillary markets at the moment until we really scale 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: 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 Sosiak : So we came to market like right out the bat with a superior product, superior consumer experience. Our infused joints, they're created with premium bud that we grew up. Usually, most infused joints are how to source the cheapest cannabis, and most of the time, it's 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 quality in terms of high and in terms of flavour. We also use our keef that we create here. So this is Keef, that's fresh keef, genetic specific Keef to not mixed up, not two years old. So all of that components plus the flavours that we've created and really R&D to really find flavours that resonate with consumers. We all handled that R&D internally and really created a product that we knew guaranteed freshness, consistency and quality, and that was, we wouldn't have been able to do that 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 avoid risks that having consistency and quality issues and that single-handedly can reduce or completely eliminate volume in a product. So being consistent and having that quality really propelled our infused pre-rolls in Quebec, over 70% of the market, which is insane, and now we're introducing our trifecta, which is a level up. So, I'm really excited to see how that's going to play out, and yes, I think that's why we're succeeding here in Quebec.
Scott Carroll: Thank you. Next question received, 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 Sosiak : Yes, so firstly, like we only open rooms when we see our increasing demand and increasing support and distribution for our products. We're number seven nationally. So we still have six more companies to take market share for and absorb 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 diligent in our planning. We have a sales forecast that we plan from item to province in detail, and we transform that into a unit base into how much cannabis 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 what really triggers opening more rooms. So we do it very diligently, and we see that flag come up, and we're like, okay, let's turn on another room. So really, why that happened is one organic growth across all our SKUs and SKUs that have been here for four or five years are still selling Cuban links across all the flower dry flower, pre-rolls, live resin are still selling. We want to launch new products, we want to launch new products. We want to launch new genetics. We have a whole roster of genetics waiting, but we got no room to plant those. So we got to open more rooms. Also, really, we have to understand that vapes are coming to Quebec. That's huge. I think it's going to be 10% of the sales here in Quebec as it scales up. So we want to play a meaningful part of that market and we can't be out of stock. So, and, 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 the trifectas coming up, we have our meat pie that's launching. We have Wagyu Delight outside of Quebec. We have our Porto Leche. We just pheno-hunted, three new genetics on it. 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 gap, and that's why we're turning on two more rooms, and, yeah, we're going to be planning another three more rooms, in 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, that's really the objective, and we have to open more rooms to achieve that objective.
Scott Carroll: Thank you. Next question received. Previously, you've mentioned that Cannara's 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 Sosiak: 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, 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 unpredictable. There's regulatory. Things are building out. Plus all our competitors are going international. That's really the hottest topic to, Canadian cannabis right now is selling internationally. Yeah. You're making a lot of money. You're making profit. You can start building a sustainable or start building a business and hopefully become sustainable if you can manage all those risks but for Cannara, 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 going to lose that consistency. So staying focused on Quebec sorry, on Canada, and all our sales in Canada. That's our number one strategy. As we build out and we see, definitely, you said the international market or the wholesale market as an ancillary revenue stream as we build out of keeping our product fresh, right? You have to remember that cannabis ages over time, and you want to make sure that you get that product within the first three to six months to your client. So as we grow, we might have some overages that we couldn't sell in time for the six months or get the distribution. So we'll use the B2B market and international market to absorb that cannabis, make money, make margin on it, 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, up, definitely top three producer in Canada, with the ultimate goal being number one, we'll look to international. Of course, we're a cannabis company. We're going to build, once we dominate Canada, we will look into international, bringing the brands that we've created here in Canada that Canada's known for. Bring them international overseas in those markets and growing the proper way in those markets over time. So that's how we're going to handle the international opportunity long term.
Scott Carroll: 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 Sosiak : Yes, so for operating cash flow, we did prepay our excise tax obligation before the end of the month. As you know, like sales taxes, it's due the previous month's due by the 30th 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 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 CAD 3.5 million payment before the end of the month, and we didn't receive the related cash revenue from the sales for that transaction. So that created a gap in our cash flow, a timing gap, which we're going to see flip in Q3. We also invested over CAD 1.5 million in prepay packaging. So this is what I've mentioned earlier, of trying to take cost events, which is by buying in bulk and buying overseas and avoiding supply chain issues. So we really purchased over six months of stock from overseas that where we're, it takes two months to receive stock. So we invested in that, so that affected our operating cash flow and in turn our free cash flow by close to CAD 5 million. And that we're going to see the flip of that and the benefits of that in cash flow come in Q3, as we don't have to spend cash on packaging material -- as much cash on packaging material and then we get the flip of the revenue coming in without the related excise tax payment in Q3. So, that's hopefully explained the reason on the operating free cash flow.
Scott Carroll: 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 Sosiak: [Technical Difficulty] Launches previously to the sales team coming on at the end of 2024, all of our launches were just launched, and no one was made aware, but people loved our brands that the bud tenderers would make themselves aware that these launches were available. So now, we have a sales team that can propel launches and get that into market. So that's how we can get penetration easier into those stores and build a SKU base, and eventually build over time more revenues generated from each store. So, each, the real objective of our sales team is to educate our network. They have to educate the whole budtender, 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 get those SKUs on the shelf so that customer can buy. We're deploying trade marketing assets previous to end of 2024. You walked into a store, retail store across Canada, there was no marketing trade display assets for Cannara, Tribal, Mug, or Orchid. So we had to compete. The customer would only know about a Tribal product if they heard about it or from a friend, or the bartender 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, we're not putting a huge budget behind it at this point. So it's one of our tools in our toolkit to increase revenue, but that's something that we're doing and is going to pay dividends over time. We're also supporting our retailers and consumers with better in-store execution, product education, and, just overall service to strengthen our relationship with them, which in turn improves the sell-through of our product at those stores. So, really, it's just continue pounding the pavement. We're pounding for strong retail engagement. We're expanding our distribution points and right now we're just seeing the early impacts of market share increases, and that's going to increase quarter by quarter as we build it up.
Scott Carroll: Thank you, Nick. Next question received. Congratulations on earning the number one market share position for mass premium 3.5 gram flower with Tribal. We understand that a portion of consumers are trading up to a larger formats of 7 gram or 14 gram. Could you comment on how Tribal plans to address the shift in consumer purchasing behavior? And, Nick, just one second. Sorry to cut in, but, your microphone seems to be it's not on mute, but we're not catching anyone. I just say a word again and see if see.
Nicholas Sosiak: Is that better?
Scott Carroll: Yeah. That's perfect. Thank you.
Nicholas Sosiak: So, yeah. No. 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 7 grams and 14 grams. We're evaluating the opportunity, but under Tribal that is. Under Nubs, we're playing in the 7 grams and 14 grams, and we're actually having a lot of success, under Tribal, sorry, under Nubs with the 7 grams and 14 grams but I've been asked a lot for Tribal, why don't we go into the 7 grams and 14 grams when everyone's playing in that market. I strongly think that there is a good place for Tribal in the 3.5 grams and we're going to be launching genetic. We want to be, as mentioned before, a house of genetics with a roster of 20-plus genetics and that's consistent staying over time. So having 3.5 grams gives customers options and if we were to play in the 7 grams or 14 grams at one point in time, it would be a mix a mix option where, 3.5 of one flavour and a 3.5 of another flavour, would be offered under the Tribal multipack to address the 7 grams and the 14 grams segment but for now, really, we're we plan to dominate the 3.5 gram market under Tribal, we think it's the most accessible, and we want to give accessible, highest quality cannabis, and that's how we do it under Tribal and then Nugz plays in the 7 grams and 14 grams for now and then over time we will see if Tribal will generate or bring to the market multi-packs under its 3.5 categories to reach the bigger formats like the 7 and the 14.
Scott Carroll : 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 Sosiak : We're seeing the market increase, the wholesale market is definitely on fire, and I'd say almost the pricing has almost doubled since last year. The reason why it exists is because international and international and the fact that 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 a lot of the cannabis is going international, and it's causing pressure on the Canadian cannabis offerings. It's increasing the price and it's harder and harder for companies to make a margin that are not producing the 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 wholesale market really as a backstop. We use it as a stopgap, and it really allows us to de-risk our operation, and yes, we again prioritize all the cannabis for our main brands but as we scale, that avenue is very useful and I think it's just going to continue increasing because there's not more production space coming online, and if anything, there's more international sales as more countries recreationalise or have a medical program. So that's going to continue putting pressure on the supply of cannabis here in Canada and I think that's a good condition for Cannara to be in as grower -- as a grower of cannabis over 40 or just under 40 tons of cannabis and on track to build out 100 tons in the next three years.
Scott Carroll : Thank you, Nick. You've touched 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 sorry…
Nicholas Sosiak : I think the trifecta and Quebec is really going to 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, or eight genetics. We'll have eight trifectas over time, and as we launch 20 genetics, we'll have 20 trifectas over time. Porto Leche, that's our newest genetic coming launching into Tribal in Q3. Going to be very exciting. It has, like, a cherry red wine creamy gas after notes on it, sports over 30% THC. We have the Wagyu delights and the meat pie coming under Nugs. So, yes, looking forward to Q3 and the launch that we're doing.
Scott Carroll: Perfect. Thank you, Nick. I see we're coming close to time. I think we will have a chance to answer one more question, and as mentioned in our press release and on today's call, should you have any additional questions, you can definitely email us at investors@cannara.ca Next question, Nick, is given the continued growth and dominance in the vape segment, is Cannara exploring opportunities, to expand its offerings within the vape segment?
Nicholas Sosiak: Absolutely. We're a big player in the vape segment. We're going to continue producing our five ten carts across Tribal and nubs, and we'll continue doing that on a genetic every genetic that launches out. We're going to continue doing that. We recently launched our live resin all-in-one, the TriPole Supernova in Ontario and our cured resins all-in-one under Nugs. That's both in Ontario and Alberta. So 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 going to build out over time and we also are developing our solventless vape all-in-one for Nugs. This is a project that we've been working really hard on. It's very important to find the right hardware because solvenous rosin reacts differently than BHO 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 solvenous carts, which is one reason why we haven't seen solvenous 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 solvenous cart 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: Thank you, Nick. I think we have time, so that concludes our Q&A portion. I'll open the floor to you, Nick, for any closing remarks.
Nicholas Sosiak: Just want to say thank you, everyone, for taking the time to, listen to our Q2 earnings call and our live Q&A session. Hopefully, you got some further insights into our business. We're not changing our tune or 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, Zohar Krivorot, who couldn't be here today, work 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 our story and wish you a great Tuesday. Thank you, everyone.
Scott Carroll: Thank you, Nick. Thank you all participants. Have a great day.