Good morning, everyone. Welcome to Cannara Biotech's Q2 2026 earnings call for the three months ended February 28th, 2026. Today's presenter is Nicholas Sosiak, CFO, joined by Zohar Krivorot, Founder and CEO. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. Before we begin, please refer to slide two and three for our caution regarding forward-looking statements and non-GAAP measures. I will now turn the call over to Nicholas. You may begin.
Good morning, everyone, and thank you for joining our Q2 earnings call. Q2 reflects continued execution of a model that is delivering consistent and profitable growth. For the quarter, Cannara delivered CAD 27.2 million in revenue with strong margins and profitability, generating CAD 6 million of adjusted EBITDA and CAD 2.9 million of operating cash flow. This represents our 20th consecutive quarter of positive adjusted EBITDA and our 14th consecutive quarter of positive operating cash flow. Despite normal seasonality, we outperformed the market, increasing retail sales and expanding market share while maintaining profitability. We increased national retail market share to 4.4% and defended our position as the number one licensed producer in Quebec, achieved in December of 2025. This performance reflects a system that is working. Our model is built on delivering premium-quality cannabis at competitive price points, supported by a structurally low-cost, vertically integrated platform.
That model is translating into category leadership across Tribal, Nugz, and Orchid CBD and was externally validated this quarter through industry recognition, including Pre-Roll of the Year for Tribal Cuban Linx Trifecta and Concentrate of the Year for Nugz Bubble Up Hash Rosin at the National Kind Awards. In Quebec, where no marketing spend is permitted, product quality stands on its own. This was evident in the launch of the vape category, where we captured over 25% of the category share, contributing to our number one overall market share position in the province. Operationally, this is supported by a scalable, fully owned cultivation and processing assets. We are currently operating at approximately 50,000 kilograms of annualized capacity with a clear path to 100,000 kilograms aligned with demand.
As Farnham reaches full processing capacity, we are investing in a new processing center at Valleyfield, which will expand throughput and unlock additional cultivation within our existing footprint. In parallel, we are also preparing three additional grow rooms for activation heading into fiscal 2027, representing approximately 15,000 kg of incremental capacity with a high ROI capital investment of approximately CAD 1 million per room. To note, each room has the potential to generate over CAD 10 million in annual net revenue, highlighting the strong operating leverage of our model. This allows us to scale production in a disciplined, demand-driven manner, growing revenue while maintaining margins without relying on external capital.
That being said, as recently announced in February, we had the opportunity to complete a CAD 6.3 million strategic investment with Ventum Capital at a premium of CAD 2.10 a share, further strengthening our balance sheet to support continued investment and future growth opportunities while reinforcing investor confidence in our operations. We also enhanced our capital markets profile with our up-list to the OTCQX market in the U.S. and subsequent graduation to the Toronto Stock Exchange in March 2026, increasing our visibility and accessibility to a broader institutional investor base. In summary, the takeaway is clear. Cannara is executing a proven, scalable model of profitable growth, combining brand leadership, cost advantage, and capital-efficient expansion. With that context, I'll walk you through the financial performance for the quarter. Results this quarter reflects both continued growth and disciplined investment in the business.
On the top line, gross cannabis revenues before excise taxes increased to CAD 37.8 million, up 3% year-over-year, driven by a 7% increase in retail revenues, offset by a decrease of CAD 1.4 million in wholesale revenues. Total revenues increased to CAD 27.2 million, up 2% year-over-year. This growth was supported by deeper penetration in existing markets, addition of new genetics, and continued product innovation across the portfolio. Importantly, this was achieved despite overall Canadian cannabis retail sales remaining essentially flat year-over-year for comparable periods, highlighting our ability to gain share in a stable market environment. From a profitability standpoint, performance remained strong. Gross profit before fair value adjustments increased to CAD 11.6 million, up 7% year-over-year, with margins expanding to 43% compared to 41% in the prior year.
This margin expansion was driven by improvement in cultivation yields, enhanced post-processing efficiency, and the benefits of scale across our platform. At the operating level, operating income was CAD 3.3 million, compared to CAD 5.9 million in the prior year. This year-over-year decline reflects strategic growth investments, sales and marketing expansion, ongoing research and development, uplisting-related fees, scaling our G&A, and higher non-cash share-based compensation. As a result, adjusted EBITDA was CAD 6 million, or a 22% margin, compared to CAD 7.1 million in the prior year. Net income for the quarter was CAD 1.7 million, compared to CAD 3.3 million in Q2 of 2025. More so, we saw significant improvement in cash flow generation. Operating cash flow was CAD 2.9 million compared to -CAD 2.6 million in the prior year, reflecting stronger underlying operating performance.
Free cash flow was approximately -CAD 0.3 million, compared to -CAD four million in the prior year, effectively break even, despite higher capital expenditures of approximately CAD 3.2 million compared to CAD 1.5 million in prior year, primarily related to the Valleyfield expansion and post-processing investments. On a sequential basis, gross cannabis revenues before excise taxes declined 10% sequentially in Q2 from CAD 41.8 million-CAD 37.8 million. This was primarily driven by normal post-holiday seasonality in provincial board purchasing patterns, especially in Quebec, along with lower wholesale revenues. Importantly, this was a timing issue in board ordering, not a demand issue. In fact, our underlying consumer performance remains strong, with national retail market share increasing from 4.1%-4.4%, estimated retail sales growing 5%, and that outperformance came during a period when the overall Canadian cannabis retail market declined 4%.
Operating and net income improved quarter-over-quarter, reflecting strong underlying profitability while adjusted EBITDA and cash flow decreased, primarily due to normalization from a strong first quarter and additional working capital movements. Looking at year-to-date performance, the underlying trend for 2026 is clear. Gross cannabis revenues increased 11%, driven by 12% growth in retail sales, significantly outpacing the broader market, which only grew by approximately 1%. Total revenues increased to CAD 57.3 million, also up 11% year-over-year. Gross profit increased 21% year-to-date to CAD 25 million, with margins expanding to 44%, reflecting continued operating leverage and efficiencies across cultivation and post-processing. Year-to-date, operating income came in at CAD 6 million versus CAD 10.1 million last year. This year-over-year change in operating income largely reflects accounting movements and intentional investment behind the business, particularly in commercial capabilities and research and development, rather than weakening in underlying operations.
Adjusted EBITDA increased 14% year-to-date to CAD 14.9 million, demonstrating the scalability of the platform despite continued investment. Operating Cash Flow reached CAD 10.9 million, more than tripling compared to the prior year, while Free Cash Flow increased to CAD 3.1 million, even with a significant increase in Capital Expenditures of CAD 7.9 million in the first six months of 2026, compared to CAD 2.7 million in Capital Investment in the same period of prior year. Overall, the financial performance reflects a business that is scaling efficiently, expanding margins, generating Cash Flow, and investing in future growth in a disciplined manner. Even within a seasonally softer environment, we continue to take share across the market. Moving on to broader market conditions, the national retail environment experienced market softening in the quarter, reflecting normal post-holiday consumer seasonality, with total estimated Canadian retail sales declining approximately 4% quarter-over-quarter.
Despite that backdrop, Cannara continued to grow. Our estimated national retail sales increased to approximately CAD 55.7 million in Q2, up CAD 2.7 million or 5% quarter-over-quarter, reflecting continued strength across our core markets and product categories. What's particularly notable is our relative performance. Among Canada's top 10 licensed producers, Cannara was one of the few scaled operators to deliver positive sequential growth, while the majority of our peers experienced declines. In a seasonally softer market environment, Cannara is not just holding share, we are taking share. This outperformance is being driven by the strength of our branded portfolio, continued innovation in genetics and product formats, and disciplined execution across cultivation, production, and distribution. At the national level, Cannara's estimated retail market share increased to 4.4% in Q2, up from 4.1% in Q1, and continuing to trend higher year-over-year.
In Quebec, which has now surpassed British Columbia to become Canada's third-largest cannabis retail market following the launch of the vape category, we further extended our leadership, reaching approximately 14.3% market share in Q2 and maintaining our position as the number one licensed producer by retail sales. Beyond Quebec, we are seeing continued momentum across multiple provinces, including British Columbia, Saskatchewan, and Manitoba, highlighting the strength and portability of our model. In Ontario, while share remained stable through Q2, we are already seeing early signs of acceleration into Q3, with market share increasing to approximately 3.7% in March of 2026. This momentum is being supported by the performance of recent product launches, including Nugz Flavor Bomb, which has consistently ranked among the top three infused pre-roll products by wholesale sales dollar in Ontario since launch.
We expect to continue expanding the Flavor Bomb sub-brand through fiscal 2026, supporting further growth in the high-margin infused pre-roll category. Overall, these gains are being achieved within a seasonally softer market environment, reinforcing our ability to consistently take share through disciplined execution, product innovation, and strong brand performance. That strength across provinces is being driven by the depth and performance of our product portfolio. Across Nugz, Tribal, and Orchid, we've established leadership positions across multiple key categories, including infused pre-rolls, hash rosin, live resin vapes, and CBD flower. Importantly, this leadership is not dependent on a single product or category. It is diversified across formats, price points, and consumer segments, allowing us to consistently capture demand across the market. At the core of this is our innovation engine.
Through our in-house genetics program, we screen hundreds of phenotypes annually to identify high-performing cultivars with strong yield, potency, and differentiated terpene profiles. To bolster our brands and product leadership, this quarter, we have a number of exciting new launches. Under flower, we have launched two new cultivars, Gran Turismo under Tribal and Florida Oranges under Nugz, with additional launches planned, including CBD Jean Guy under Orchid. For live resin and rosin, in addition to our successful vape launch in Quebec, we have one new all-in-one, the Bubble Up Supernova, that hit the market in addition to the planned launch Gran Turismo live resin 510 vape cartridge in the coming weeks. Last but not certainly least, we are very proud of our launch of the Nugz Flavor Bomb sub-brand to capture the growing demand for high-potency Liquid Diamonds products.
In mid-December, we kicked off the launch with a five-pack of infused pre-rolls that has quickly reached and maintained a top three position in Ontario. We will be extending this product line further over the coming months as we expand across Canada and will also be launching in the vape category with exciting flavors in 510 vape cartridges and all-in-ones. This continuous pipeline of innovation allows us to stay ahead of consumer preferences and sustain our leadership across categories. With that demand now building across the portfolio, we are well-positioned to scale that success as we expand lockstep with production capacity. Let me walk you through our balance sheet, which reflects the financial foundation we've built to support our next phase of growth. Starting with cash, we ended the quarter with CAD 21.9 million, up CAD 7.5 million from CAD 14.4 million at August 31st, 2025.
This improvement reflects strong operational cash generation and the recent capital raise with Ventum Capital while maintaining a disciplined working capital strategy. Working capital increased to CAD 61.3 million, up CAD 13.3 million from CAD 48 million at the start of the fiscal year. That figure is composed of CAD 21.9 million of cash, CAD 69.2 million in receivables, biological assets and inventory, and other current assets, offset by CAD 20.7 million in accounts payable and accrued liabilities, and CAD 9.1 million in current debt obligations, the latter down CAD 4.3 million from the start of the fiscal year, reflecting meaningful progress in reducing near-term obligations. Accounts receivable came in at CAD 12.5 million, down CAD 1.6 million from the start of the year, in line with slight decrease in sales, but demonstrating healthy collection activities during the period. Inventory increased to CAD 48.6 million, up CAD 4.1 million since year-end, driven by higher production at Valleyfield.
This is a deliberate build to support future growth, not a demand concern. We have been preparing inventory ahead of expected sales expansion, and as that volume moves through the system over the remainder of 2026, we expect the balance to convert into revenue and normalize. Biological assets were CAD 5.5 million, reflecting the value of cannabis currently in production. Together, these two line items reflect the underlying value being created in our growing and production operations. Property, plant, and equipment came in at CAD 89.7 million, up CAD 4 million, a direct reflection of our ongoing capital investment into the Valleyfield facility. Total assets grew to CAD 181.8 million, up CAD 13.2 million from CAD 168.6 million as at August 31st, 2025. Liabilities remained well-controlled. Current liabilities decreased by CAD 4.4 million to CAD 29.8 million, and non-current liabilities were essentially flat at CAD 31.8 million.
As a result, net assets increased by CAD 18 million to CAD 120.2 million, a strong and growing equity base. On the financing side, we maintain access to a revolving credit facility for working capital purposes. As of quarter end, the weighted average rate was 5.29%, and subsequent to quarter end, all tranches were renewed for 90-day terms at a more favorable interest rate of 4.89%. We also hold a CAD 5.1 million letter of credit to cover deposit requirements with a provincial supplier at Valleyfield, which is expected to gradually decrease as electricity is consumed over time. From a capital markets perspective, over 30-day average market capitalization is approximately CAD 180.7 million, based on an average share price of CAD 1.83 and approximately 97.8 million shares outstanding. Taken together, this is a balance sheet built for growth, liquid, well-capitalized, and with liabilities that are stable and manageable.
Before we open the line for questions, let me bring it all together. Cannara is executing a focused and disciplined model. It's delivering results. We are consistently gaining market share across provinces, driven by a portfolio of leading brands, strong product innovation, and a clear price to quality advantage. At the same time, we are converting that growth into profitability and cash flow while scaling our platform in a capital efficient and demand-driven manner. Our vertically integrated model gives us control over quality, consistency, and cost, allowing us to compete effectively and continue taking share even in a competitive and evolving market. Importantly, we are doing this from a position of financial strength with the ability to fund our growth internally while maintaining a disciplined approach to capital allocation. The result is a business that is growing, profitable, and structurally advantaged.
With a clear path to expand capacity, increase distribution, and deepen our leadership across key categories, we see a significant runway ahead. In short, Cannara is a scalable, cash-generating platform with a proven model to keep compounding profitably in line with demand. Thank you for your continued support. We will now open the line for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Our first question will come from the line of Nicholas Cortellucci of Atrium Research. Your line is open, Nicholas.
Hey, Nick. Hey, Zohar. Thanks for taking my questions.
First thing I wanted to ask about was if you could give us some more color on provincial performance. What did you guys do right in some of the provinces where you gained share?
Yeah. Absolutely. I think we thrived in Quebec going from Q1 and Q2 with the vape launch. With the vapes launching towards the end of Q1 in November, there was a lot of front-loading into Quebec, which is why the sales were a bit front-loaded in Q1, and then going into Q2. As with all type of launches, there's the initial spike, and then it levels off, and we're pretty happy where it has leveled off, being 25% of the category. It's about just about an 8% increase overall, to Quebec's sales, moving them into the third largest province. I think they did the vape launch extremely well. This quarter for us, also in terms of innovation, was pretty quiet. Not many launches other than a couple of all-in-ones and two or three SKUs.
Most of our SKUs are getting launched in March and April and June of this year. We're going to see that take effect in the quarter.
Got it. Okay. Thank you. Maybe just from a product format perspective, where are you seeing the growth and what's holding you guys back?
One thing about us is that we didn't play significantly in the 28 gram or large formats, the 14 gram packs, the seven gram packs. Tribal has been exclusively focused in 3.5 and it's carved out number one in the mass premium category, just on the 3.5s alone. Going into larger formats, 14 grams is what's coming down into Q3 under Tribal. We'll be launching three of our cultivars in 14 grams, which have a significant volume increase compared to where we are in the 3.5s. That's what we're looking for in the coming quarter, as well as expanding our Flavor Bomb line. The infused, we have a five-pack multi-pack. We're also launching a three-pack, a single flavor, as well as a one gram, 60% Flavor Bomb.
We're also launching that Flavor Bomb flavors in 510 cartridges in Liquid Diamonds, as well as all-in-ones.
Great. Okay, I appreciate that. Last one was just if you guys could provide some more detail on the construction update. What's been completed so far and what's on the docket for Q3?
Right now we have the support building. All the concrete has been poured, and we are in the process of finalizing our EU GMP architect drawing. Once that is done, we're going to break ground, building out those walls and everything else that's required to get this EU GMP certified in the support building. As of now, the concrete, the fumigation, and a lot of the electrical portion has been done. Once we get the green light on the architectural drawing, then we can start building out timeline until December 2026.
Amazing. Okay. Well, that's all for me. Thanks for answering my question, guys.
Thank you.
Thank you, Nick.
Our next question will be coming from the line of Ryan Neal of TD Cowen. Your line is open.
Hey, guys. This is Ryan standing in for Derek, and thanks for taking my questions. Maybe I'll just start with one quickly on the SG&A and run rate there. We saw EBITDA was pressured a bit by the higher OpEx. Can you quantify the SG&A step up this quarter and how much of that is recurring versus one-time, and maybe give us a sense of what that might be as a % of sales moving forward?
Yeah. In terms of sales, marketing, and promotion, our line item that we have on our income statement, we've previously been around 9%. Our target or the max budget on that line is 10% of our sales. That particular line item is going to continue increasing as we gain distribution and invest in sales and marketing for the next leg for Cannara to double its market share and double its revenues. In terms of regular G&A, this quarter, we did have our uplisting costs that were burdened in there. We also are investing in our employees, building more of a structure, middle management. We're investing in different layers of management so that we can build structure for the next phase of growth as well. Just higher salary costs, but this is going to get stabilized from here.
So right now, we're about just under about 10% also on the G&A line. And that should go down quarter over quarter as our revenues are increasing, and that G&A stays static. And if you look at Q1, we're pretty similar in terms of G&A from Q1.
Okay, great.
Last point was just also higher. If you look on the operating expense line, we do have higher research and development costs, and that line will stay probably under half a million dollars per quarter, but we are investing in the innovation side of things.
Okay, great. Makes sense. Just following up, maybe I'll ask a quick one on the post-holiday board ordering seasonality you guys mentioned. How quickly do those board orders maybe re-accelerate after Q2? Should we think about this quarter as a bit of a timing trough?
Yeah, that's exactly what we should look at this quarter. We front-loaded. They have to get ready for December and January, so they do their orderings in November. The product, usually the ordering slow down into the December, and then January, February is, for the past many years, the industry's seasonality period. They keep ordering lower, and then going into April, they start ordering in March for the April 4/20 and the revitalization of the industry in April, and then going into the summer months, where it's been proven year-over-year just in our financials that Q3 and Q4 are the highest quarters.
Okay, great. I'll maybe just sneak one more in here. You referenced sort of a normalization on the vape sales following that initial launch spike. Where do you sort of see the steady state vape contribution for you guys in Quebec in the longer term?
Yeah, I think it's going to be very stable from here. Quebec doesn't have any intention to list any new products for a little while. We started off with 29% share, and it's been now three, five months now that we're level off at around 25%-26%. We have the number one SKU in vapes, the Jean Guy under our Orchid brand. Plus we make a high margin on it. It contributes. I think it's going to level off to where we're seeing the effects of seasonality because it did take an effect also in Quebec, in January and February. We're already seeing the reordering patterns of SQDC spike following in March and going into April. We expect to see that increase or that pattern follow in the vape category, too.
From where I see, I think it's going to stay around until they add new SKUs or remove the 30% THC. We're probably looking at 9%-10% of their overall shares. I think they sold CAD 230 million last quarter or CAD 220. It's about CAD 20 million of revenue for them.
Okay, great. Thanks, Jess.
And as a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our next question will come from the line of Jeff Kowal of The Private Investor. Your line is open.
Yeah. Hi, guys. First of all, congratulations on another solid quarter and achieving number one status in Quebec. Well done.
Thank you.
I have two questions for you. The first is pertaining to the obvious gap in market share between what you presently have in Quebec and in the rest of the provinces in Canada. As you've mentioned, there's a marketing strategy in Quebec, and I know that the other provinces have different sort of data deals or shelf space deals that retailers require you to get shelf space. My question is, what is your overall strategy to increase market share in provinces where you're largely required to pay for shelf space?
The strategy is as we come up with new genetics, new products, new innovation products, a lot of those dispensaries or even our account, the ones who have multiple dispensaries, they always want new stuff on their shelves. There's obviously the shelf space, like you mentioned, but there's also the consumer demand. If they want a Tribal product or a Nugz product or Orchid, this is why.
In general, just the brand awareness is important and all the marketing spend that we're doing. We're spending a lot on marketing. We are in good terms with all our key accounts. As we release new product, there's really no reason why they don't end up on the shelf. Organically, we've been doing this for the past few years, and there's a steady increase, organic increase. The other thing that could happen is if any one of our competitors loses a little bit of momentum, well, that's more shelf space for us to grab. Either they go to a CCAA, or they, for some reason, decide to pull out of that key account. Well, we usually get the benefit from that.
It's a combination of new product, new SKUs, brand awareness, the Nugz, Orchid, and Tribal, and then just other suppliers or other LPs, licensed producers, that are not performing well. Well, those SKUs come out, and then we have a good chance to capture that shelf space.
I appreciate that. Thank you. My second and final question is in regards to international expansion. Zohar, you just mentioned that the new processing or soon-to-be-new processing capabilities are going to be certified for exportable product. Up until now, you've been completely domestically focused. We're obviously all aware that you have ample future capacity in another 12 or so rooms that you can turn on. It sounds like that is part of your strategy. Are you able to talk, just very broad level at this point, about how you intend to get your products into the EU market?
Sure. We're actually in Berlin as we speak for the ICBC Berlin show, which is the largest European cannabis show, our first. We're learning a lot. We're educating ourselves. We're making some great contacts, where a lot of them already knew about us. They're happy to see us here. I think, like I said earlier, by December, our EU GMP post-harvest facility is going to be finalized. At this point, we're going to be sitting down with a lot of the contacts that we made, a lot of the contacts that reach out to us. The goal here is to maintain our margins. If we're able to allocate a little bit of volume to the European market and still make the margins that we need to make it interesting for us, then we'll go for it. Again, the focus is really Canada.
We need to dominate Canada. We want to be number one. We want to be in all the dispensaries and really build that brand equity that I was mentioning earlier. With empty rooms, and excess inventory, if we do have, EU GMP enables us the ability to move some of that volume internationally instead of B2B that we're currently doing today. Today, anything excess inventory goes to another LP, and we don't get a lot of money per gram doing that. If we can take that excess inventory and then move it to Europe and perhaps get more money, that's a lot more interesting.
Canada first as always, and then with the EU GMP post-harvest facility and the contacts that we're making and the relationship and collaboration that we're doing as we speak allows us to get more dollars per gram on anything excess that we have that Canada cannot consume.
That's great. Thank you for the fulsome answer. Keep up the great work, gentlemen. Thank you.
Thank you.
Thank you, Jeff.
I am showing no further questions at this time. I would now like to hand the call back over to management for closing remarks.
I would just like to thank all our shareholders, investors, and prospective investors in following our story and listening to our Q2 2026 earnings call. As you noted in the call, we are heads-down focused on execution and building the next foundation for Cannara. We've turned on 12 rooms. We've built out three brands. We've sold 50,000 kilograms annually in the Canadian market, and the next four years is not going to be any different. We're going to continue focusing on that. In closing, we are exploring opportunities to accelerate the expansion as well for Cannara and provide quicker returns on investment. With that, thank you, everyone. Thank you shareholders, investors, and prospective investors for joining us, and have a wonderful day.
Thank you.
This concludes today's conference. We do appreciate your participation.