Good morning and welcome to Cannara 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 the prepared remarks, we will conduct a question- and- answer session. Please submit your questions to investors@cannara.ca or in the chat option in your browser. Before we begin, please refer to slide 2 and 3 of our earnings presentation. All information today is subject to our general disclaimers on financial measures and forward-looking statements, which are available to be read in detail at sedarplus.ca. We are now going to turn our presentation over to Nicholas Sosiak, Chief Financial Officer at Cannara Biotech .
Thank you, Scott. Good morning, everyone, and thank you for joining Cannara 's earnings presentation for the fiscal third quarter ended May 31st, 2025. My name is Nicholas Sosiak, CFO of Cannara , 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 31st, 2025. I am proud to announce that we are executing to plan, steady quarter-over-quarter growth with fiscal 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 kg- 50,000 kg. As a result of this breakthrough, we've achieved our fiscal year 2026 cultivation target a full year ahead of schedule. Finally, we have received approval, pending financial procedural steps, for 5 of the 25 total vape SKUs onboarded by the SQDC for the highly anticipated vape category launch this November.
This new category launch in our home province is a significant opportunity for Cannara 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 metric. 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- over- 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 to 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 expanded capacity following the activation of additional grow rooms at our Valleyfield Facility. 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 up 40%, and while we expect gross margin fluctuations on a quarterly basis, we expect to see a 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 the prior year. We delivered record high adjusted EBITDA of $7.6 million, up over 7% quarter- over- quarter and 170% growth versus the prior period year. This represents approximately 28% adjusted EBITDA margin, a 115% basis point improvement quarter- over- 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 come 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 margin. 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. Cannara 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 key 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 the $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 2021 for the acquisition of our Valleyfield Facility. Over 50% insider ownership means Cannara 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 the Limbeck, which is maturing to 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 a $5.5 million 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 Cannara 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 Cannara'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%- 8.5% of the category share, while the number one competitor declined, now ranking us number two in Canada and number one in B.C. 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 at 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 Pheno Hunt 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 Valleyfield 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 particularly 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 Valleyfield rooms are activated today and operational, up from 10 rooms in fiscal of Q2. The newly activated rooms 11 and 12, after our breakthrough in cultivation improvements, will allow us to now increase our capacity to annual yields of 50,000 kg per year, representing a 50% increase in production since fiscal 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 Cannara owns. Cannara'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 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 Cannara 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. It is 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 is becoming clearer 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 labor costs in Canada.
One of the most compelling benefits is the province's exceptionally low electricity rates at just $0.059 a kW, substantially lower than those in other provinces such as Alberta, where rates are as high as $0.14 a kW. 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 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, make Quebec an ideal environment for Cannara 's growth. While many Canadian LPs are expanding overseas out of necessity, we are thriving in Canada by choice.
The reality is that most cannot compete here profitably. They are 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. The history of overbuilt, over-capitalized 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. Cannara 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 them.
[crosstalk-Thank you, Scott.]
Nick, thank you, Nick. We'll start with the first question we received. 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 kg?
Absolutely. The plan was always for Valleyfield to reach 100,000 kg, but in order to reach 100,000 kg, we had planned to build out our rooftop greenhouse. That was going to happen after 2026. However, with the recent cultivation improvements and changes in our cultivation techniques, we've actually been able to reduce our overall growth time without utilizing the additional space on the rooftop. So, this way, right now, with our 12 rooms, we've achieved 50,000 kg. We now can expand to our 12 other rooms to get to 100,000 kg without turning on our greenhouse. The greenhouse will eventually be planned for additional biomass and additional kilograms on top of that as we plan out that project. For now, the greenhouse is not forecasted inside our production capacity.
Thank you, Nick. Follow-up question is, why is the number of rooms opening for 2026 set to zero as of now?
Absolutely. We had 12 rooms originally before the expanded yields. We had 12 rooms, and based on our runway, we were planning to turn on an additional 3 rooms in 2026 to get us to the 50,000 kg. 50,000 kg is really our post-harvest capacity limit at this point in time because we've been leveraging our Farnham Facility to do all the drying and the trimming. Now, because of the increase in yield, we've decided to keep our 12 rooms because we've already achieved our annual capacity target and now invest in our processing center so that we could be able to scale our next 12 rooms and handle the full 100,000 kg.
Okay, thanks for that, Nick. And lastly, any chance of seeing stock buyback this year to keep the number of shares stable, or are you more focused on paying debt as of now?
Yeah, great question. We did a buyback earlier when our stock was below $1. The objective for going forward, at least for the next fiscal year, is really focusing on our CapEx project, the processing building, and growing the next 12 rooms so that we can achieve full capacity and also paying down our debt, starting off with the highest interest debt and then working our way down, at which point then we'll be in a position to look at stock buybacks again.
Okay, we'll move over to the Q&A function chat. So there the first question is, outside Quebec, what are your competitors doing that Cannara is not doing yet that could help you grow faster?
So we've taken a very slow and steady approach on sales and marketing. We're Quebec-based, where sales and marketing is not permitted, and we didn't develop a sales team or marketing for this market. And over time, and just pretty much since last year, we really started deploying a more rigid sales and marketing program. That's a sales team across Canada. We're only five or six compared to our competitors, which are well over that number. And you know trade display programs, marketing programs, we're just starting to get you know deploy that marketing spend. Of course, always making sure that we're not spending more. Our limit right now is 10% of revenues from sales and marketing. It's a line in the sand that we put in to sustain growth. Are our other competitors spending much more than 10% of their revenue? Absolutely. Are they really working with key accounts? Absolutely.
And that's something that Cannara is doing strategically, quarter over quarter, and making the right moves quarter over quarter to ensure that we're growing at a steady pace and efficiently and effectively.
Thank you, Nick. Turning over to some questions related to the vape cartridge launch at the SQDC this fall. The first question is, do we know how many vape SKUs the SQDC has approved thus far? I'll add to that, it was a follow-up question. Do you have a sense of how many carts will be distillate-based, how many all-in-ones, or other Live Rosin Vapes?
What we do know is that 25 carts were accepted in-store and 5 carts were accepted online. As we do know, based on the current market here in Quebec, if you're an online SKU only, it's very hard to succeed. We can look at the market as really 25 SKUs, and Cannara having 5 SKUs represents 20% of the in-store shelf space of that. And just looking at our infused, the infused market share, where we're 70% of the market, we're really excited about our market share in the vape category, knowing that we have 20% of the shelf space and across all three brands. All three brands, which is very important to us, have a vape cart: Orchid, Nugs, and Tribal. Do we know what kind was accepted? No, we don't. We don't know the makeup of it.
There's no all-in-ones, so these are all standard 510s, again with a lot of restrictions. Ohmage and voltage settings are pretty much dictated by SQDC to the color and the font that you use on the vape cart. Highly regulated 510s only for now. We do have 2 Live Rosin Vapes out of the 5 SKUs that are launching. So we're really excited to see how Quebec's going to enjoy our vape carts come November.
Thank you, Nick. As a follow-up, still related to the Quebec market, besides vape, what other changes will the SQDC be implementing or planning based on what you know?
Besides vape, what we do know is that they're getting rid of what they call the Nursery Program. So, the Nursery Program was for new SKUs. Any new SKU that was accepted within SQDC would go into the Nursery Program, which would be about 15- 20 stores out of their 107-store network. And then they would track the sales for six months and eventually, after six months, decide to go full retail or delist the product. That is currently abolished. All new products going into SQDC, once accepted, will go to the full Planogram. That is about a 3-4x times the sales that you would see on a nursery, your SKU seen on a Nursery Program versus a full Plano. We launched a couple of SKUs in April in the SQDC, which are really performing well, our G-Mint Trifecta, the Nugs Meat Pie.
Those are actually still in Planogram, nursery Planogram. And come, I guess later on this year, they'll be transferred into the full retail Planogram, which will definitely see some increased sales for us. Other than vapes, other than the Nursery Program, I think they're also really focusing on improving the customer experience at SQDC. So the in-store customer experience, really showcasing the product, allowing the suppliers to showcase the actual product. So I think they're making some changes that will help promote the customer experience and hopefully end up in increased sales over time.
Thank you, Nick. Next question received is as follows: Considering the recent federal changes concerning temporary foreign workers becoming fully effective this fall, should we expect any effect to your operations, particular staffing costs, and capacity management in Quebec?
Most of our staff are hired internally, Quebec staff. We do use agencies, though we've verified and done our due diligence, and there's no effect on Cannara on increased staffing or costs or even management of it, given the new regulations. So, we're well aware of it, we're monitoring it, and based on our conclusions, we've avoided any additional costs or work to be done, given that new regulation.
Okay, thanks, Nick. Next question is, inventory has trended up in the last quarter. Is this mainly to support forecasted growth, or is there some seasonality to this? How should we look at inventory levels going into the next few quarters?
Yeah, so there's some seasonality, as we mentioned, with the Q2 cash flow issue, where we did have lower cash flows because we did invest in inventory, paying the deposits. So, again, we're buying a lot of inventory from China, so the Chinese New Year. We preloaded inventory. If you look at our breakdown of the makeup of our inventory, there has been a big bump in raw materials that reduced costs and we'll be using over the remaining of the year. In terms of how to look at it, we always look at it, one, internally in terms of how much of our cannabis is within a six months timeframe, which is ideally what we want our cannabis to be from harvest date to sale date is within six months. Over 90% of our inventory is within that range. That's one benchmark that we do internally.
And then externally, I would say that we can look at our costs on our income statements, how much we're doing on a quarterly basis, which is about $15 million, $15.5 million of costs. Then look on our inventory level, our inventory balance in the note breakdown, where you see the cost and then you have a fair value component on it. You'd have to back out the fair value and look at the cost. We're about $30 million, which tells me we have about $16 million of runway, which is aligned with what we're looking at. Yes, are we trending up? Yes, but that's also because we've increased our yield and we're expecting 20% or more going into next year as a budget to increase our sales. So, we have to get ready for that moment. That inventory level for us is in check with our sales track record.
Great, thank you, Nick. Next question is, there are a number of financially constrained companies that are still operating in the industry. What will happen to these companies, and how will it impact Cannara over the short and medium term?
I mean, we've already lived it for a while. We see these financially constrained companies that don't have access to capital have really pushed their strategic plan in Canada to the max that they could. Some found success through international sales and moving internationally and restoring their business internationally. Others are you know gonna hang on for a little bit more and unfortunately go through the CCAA Process. Mergers and acquisitions at this point in time, I think there'll still be some, but it's really not the focus. I think this is at the point where we're going to start seeing the downsizing of how many LPs are in the industry and then really refining it to the top 10 that are catering to 80% of the market. And for Cannara, we're just going to stay focused on what we do, but also be opportunistic. There's definitely synergies out there.
And we'll evaluate any opportunity that comes across our desk to see if it provides added value to the company and to our shareholders. And we'll evaluate that, with the main goal of continuing our plan and not risking anything to change that plan.
Thank you, Nick. Next question is as follows: As you continue to expand in flower, do you see untapped opportunities in your pack sizes?
Absolutely, absolutely. We right now in Tribal, we're playing in three and a half categories for the flower. In Nugs, we play in the 7 grams, 14 grams, 28 grams as well. And there's probably a little mix between both brands that we could expand into. We're looking at multi-packs where different flavors will be within a 7 or 14- gram pack. And we're just evaluating. I think we Tribal you know is a categorical leader in the three and a halfs, and Nugs is seeing some great success in our 7s and our 14 grams. We're going to evaluate each market segment. There's a lot of price compression. People move from the three and a half to the 7s and the 28s.
There's still not necessarily price compression happening right now, but the effect of price compression that happened, call it last year, and those categories having the most volume because you're selling the most grams per unit. So it's one of those categories that still has price compression in it. We're standing back on the sidelines evaluating it, going to come up with an innovative and creative offering for the market and go forward with that. A lot of opportunities, innovation, and pack size for us.
Thank you, Nick. Next question received is as follows: Have you given sales guidance for 2026?
No, we haven't. We have not, but you could kind of forecast it from the amount of kilograms we're forecasting and our average price per gram, which is reported in our financial statements. You can, that would assume that we would sell everything and have no inventory rolling into next year. So you know take a margin of inventory that you need to roll into next year and use those two variables and you can estimate where our revenue would land in 2026.
Thank you, Nick. Next question is, with the recent increase in stock price, has there been further discussion regarding the convertible debentures owner preference between repayment or conversion?
Definitely, definitely discussions. As the price gets or, you know, surpasses the conversion price, it makes it more interesting for the debenture holder. So, these are definitely discussions that are being had. You'll probably see something around September 30th, which is the date where originally agreed where we will repay $2.5 million or half of the outstanding convertible debenture with a new note. So we'll see by that time what the end conclusion on that topic is.
Thank you, Nick. Next question is, how much wholesale demand are you seeing in the market?
So, wholesale demand is continuing to increase drastically. I only have the number last year, but it was 40- 50 tons of cannabis exported internationally. And then there is still those companies that close down their grow or don't have enough production capacity to sustain their own sales. So, we are seeing a major advantage of being vertically integrated or being the grower at this point, a grower of premium quality cannabis. And yeah, so for us, it's a good sign because as we focus on our strategy of retail, we see that the wholesale pricing continues to increase, which is a great backup plan for us as we scale and we have excess inventory to sell through the B2B wholesale channel market as we scale up.
And that just proves our theory that if you control the cultivation cycle, you ultimately are eventually going to be able to control the whole product down to what you deliver to the consumer. And that was really, really important to us. We see that now, why it's so important. And wholesale prices, I think, are going to continue to increase because there's not much capacity being turned online and international sales continuing to increase. Canadian sales are also increased. We're at the highest national retail sales to date. So, everything's moving in the right direction.
Perfect. Thank you, Nick. Next question is, gross margin before fair value adjustments expanded to 44% in Q3 2025. How sustainable is this margin profile?
Our target was 40%. And as we stay focused and do what we do, which is continuously improve our cultivation, increase yields, reduce costs, automation, improvement across the whole vertical operation of our facilities, we're seeing those cost benefits. So, is it sustainable? Absolutely. Where is it going to land? Our target was 40%. We've already surpassed that. We're going to keep our target at 40% for now and continue scaling. There are variables as well, right? With cultivation, the biggest impact for your yield, your dollar per gram, is yield, right? As we Pheno Hunt new genetics and figure this out, release new things, there are variables that we just can't control at a certain point in time. We can build on it in R&D and get it to where we are or want.
But we've been holding the margin steady, increasing since we took a dip in Q2 of last year, which again that happened because of a yield issue where we Pheno Hunted two great genetics. Our R&D showed that it was great. And then when we commercialized the first lot, the yields weren't where we expected it. It took us a while to get the yields, or a quarter, basically, to get the yields to where we wanted to. The next quarter, we started seeing that reflected in the cost per gram and the yield per gram. So, there are many variables, but we understand them all. We look at them, we control them, and we're going to make sure that we always surpass our objective of 40%.
Thank you, Nick. Next question is, how does the margin profile on vapes line up against the rest of your SKU portfolio?
Again, vertical integration is a key factor in there. We cultivate, we grow the plants, we harvest the plants, we freeze the plants ourselves, we extract the plant ourselves, we fill the cart ourselves. So a lot of cost efficiencies, and that continues to improve over time because there's so many variables in that process that we're always tweaking and becoming more efficient. Our margin profile is really good on vapes, over 50%, some range up to 60% on our vapes. So it's a very important category for us. We continuously improve our costs, but also improve our quality of the product by investing in better quality hardware or better quality, just making the oil better quality. If it takes a bit longer to process, we'll do that if the quality is there. And we save in other areas where the quality is not affected. Vape carts are really important, 56% margin.
Thank you, Nick. Next question is, could you give an update on the strategy to build out the processing center in Valleyfield? What is the objective of this expansion?
As mentioned earlier, because we reached our 50 tons of capacity, we've reached our post-harvest capacity, drying and trimming. So, the objective now, which would have been at 15 rooms and then start the processing building, we're going to do it at room 12 and start really the processing building. And that's a process, it's 200,000 square feet of processing building attached to our greenhouse. The shell is already built out. This was part of the acquisition that we bought, but the interior was never built out. So, the project here would be to build out a processing center. We're looking at 10 drying rooms, two deep freezers, like serious walk-in deep freezers, hand trimming and machine trimming rooms, vault space, a bunch of other conditioning spaces, and all that stuff in our processing center.
What that's going to do is not only is it going to leverage or allow us to scale into our next 12 rooms at Valleyfield, but we're going to see cost efficiencies because right now we're transporting all our plants from Valleyfield to Farnham and then having a separate team do the drying and trimming and then processing it all there. Now that everything's going to be done at Valleyfield, there are going to be efficiencies, and we're going to be basically sending finished, bulk finished good product to Farnham, and then Farnham will recapture the old drying and trimming space into more packaging space as we scale up our operation.
Thank you, Nick. Next question is, congrats on reaching number two in Quebec by market share. How has the recent launch of Quebec Trifecta gone to date?
The market loves them. The market loves them. We're in the Nursery Program. Again, it's still a Nursery Program. We're the top- selling infused pre-roll that was launched during that period, and it's the most expensive pre-roll too. So, infused pre-roll pack. I think the market is appreciating the authenticity of that product, that we don't use distillate or botanical flavors or anything like that. It's true to terpene flavors that are representative or that come from the Tribal genetic lineup. So, really excited to see that go from Nursery Program to full launch and then launching our other Trifectas that we have. We have every genetic gets a Trifecta. We have five Trifectas waiting on the sideline ready to go into Quebec when they do their next protocol, which will only be in 2026.
Thank you. Next question is, who is the largest- selling LP in Quebec and what is a ballpark for their market share? What do they do best?
The largest LP in Quebec by 1% or 2% difference is Tilray. How did they get there? They do own some very high that were originally, you know, when Quebec first came out. Quebec is very loyal with their products. So, Tilray had some products that continued to sell pretty well. They're the lowest- priced product in the SQDC, but they sell volume. What else did they do? They also acquired a bunch of companies and brands and gained their market share through acquisition. But I think Cannara holding three brands, really two brands that hold 90% of the revenue, Orchid being 10%, but two brands being the second largest LP in Quebec with two brands and about to take over, becoming number one as we get the Trifecta and our Meat Pie into full Planogram as we launch our five new vape carts.
Again, under these two brands, it's pretty exciting that I think in a couple of months, Cannara will be the number one LP in Quebec organically with only two brands.
Thank you, Nick. Next question is, how many provinces are you listed in, or rather what provinces remain to be onboarded?
So we’re, what's left to be onboarded is the East Coast, some of the Canadian territories, not major sales, but still definitely channels to increase sales. The major opportunity for us, other than, you know, Quebec and increasing the market share there, is really expanding and diving into each of our core markets outside of Quebec, being Ontario, Alberta, and B.C. , where we, on average, we have about 14 products per store, which represents only 3% of the total available distribution points across Canada, which also ties with, you know, our market share of being 3%. So we are going to continue expanding those markets, leveraging our sales and marketing team, our innovation, our products, and continue scaling in B.C. , Alberta, and Ontario, while showing success and continuing to show success in Quebec and on the sidelines as well, expanding to the Eastern provinces to generate additional revenue.
Thank you, Nick. Next question is, are there any product categories that you're currently not participating in that look interesting to Cannara?
Yeah, as mentioned previously, there are some format categories that we don't play in every single format across our different brands. Within our existing categories, there are format plays that we're looking into. There are multi-pack plays that we're looking into. We haven't really explored the edible category. We have one SKU and are waiting for some regulations to change. We haven't explored the beverage category, which we could look into. There are the topicals and the whole medical side too. We have very minimal sales on the medical rec channel sorry medical channel, which has high sales in our existing categories, but also topicals and oils and capsules. So, that's something that category we can play in. And, yeah, that’s, I think we're in the major categories. There is going to be innovation as we continue to go, but there are some subcategories that we're looking into that could add value.
Thank you, Nick. As a follow-up question, are there any upcoming product launches or innovations in the pipeline that you're particularly excited about or see as meaningful growth drivers?
Sorry, it's our vapes. We've been working on that, nothing but that for Quebec. So, that's really exciting to see, and that's going to be a huge growth lever for us. Just expect our normal continued innovation across our product line, right? We're continuously pheno- hunting, so we're going to be launching new genetics, several new genetics every year, and every new genetic, you get it in flower, pre-rolls, infused pre-rolls across the board. Again, looking at multi-packs, multi-flavor packs, which are going to be interesting, different sizing packs as well. All that to come in the future.
Thank you, Nick. Next question is, are you utilizing any third-party relationships, and if not, any plans on doing so?
We're really fully, fully vertically integrated. We do leverage a CMO here and there when we've reached excess capacity and we need assistance to meet an order in the following week or two. But our goal is to, as we hit those timelines where we do have to leverage a CMO, we're investing and adding capacity within our internal organization to be able to handle the increased capacity. So I would say no, we don't really use a CMOs to build our products.
Thank you, Nick. This will be the last question that was submitted. It says, "Follows, you've spoken to an internal 40% gross margin target. Does this target change now that you've increased your yields?
So, we're going to keep our 40% just because it's an industry-leading margin already. Our goal is to continue over-delivering on that. Yes, will yields improve the margin? Absolutely. Will the costs, will everything that we do on a daily basis improve efficiencies across the organization? Will it improve our costs and yield? Absolutely. We're going to continue executing on all levels and continue seeing success and margin improvements as we continue to scale Cannara.
Great, thank you, Nick. That concludes the questions that were submitted. I'll open the floor for closing remarks.
Thank you, everyone, for joining our Q3 2025 financial presentation. As always, I appreciate any feedback you have. You can email me at nick@cannara.ca. Anything on our story or if you'd like any questions to be answered that weren't answered on today's webinar, it would be my pleasure. And continue following our story. But it's not done yet. There's a lot to come. We're in this for the long run, and we maintain our thesis of becoming number one licensed producer in Canada over the next couple of years as we build out Cannara and the assets that we have. So, again, thank you very much for joining me today and have a wonderful Monday.
Thank you very much, Nick, and t hank you all participants.