Next up, we have a fireside chat. Scott Carroll from Cannara and two people from Atrium.
It is okay. Do you want to kick it off?
Hey, everyone. My name is Nicholas Cortellucci from Atrium. We are going to be doing a little fireside chat here. For disclosure, Cannara is a paying client of the firm, and Scott is going to kick it off with a little overview of the company, and then we will get into some more Q&A and open it up to the audience as well. Scott, take it away.
Awesome. Great. Thank you, Nick. Pleasure to be here. So I am Scott Carroll, maybe a familiar face to some of you who have had a chance to hear the Cannara story in the past. So VP of IR and Strategy. I am joined today by Nicholas Fozard, our new CFO. Some of you may have recognized Niko Sosiak in the past as our CFO. He recently transitioned over to COO. So it is great to have you sharing the floor today, Nicholas. Nicholas joins us with 10 years’ experience, both in the U.S. and the Canadian side. So we will do a 10-minute overview of the company, and then we will do a 20-minute, 15-minute Q&A, both with Nick and the audience.
So we have our usual disclosures to go through. I want to kick it off by explaining why we think Cannara is such an exciting story that deserves attention.
First is our record of sustained profitable growth. We have achieved 21 quarters of positive adjusted EBITDA, 15 quarters of positive operating cash flow with retained earnings. This is significantly rare in the cannabis industry, given the challenging periods that we have gone through as an industry. With that, we also have brands. Am I speaking better here? Oh, there we go. Brands with national appeal. We have, over the past year, defended our market leadership position within Québec, which is the third-largest province within Canada, in addition to growing our presence in the rest of Canada. As of August of this year, we recently reached number six by estimated retail sales, with over 50% of our revenue now coming from the rest of Canada. We are not just a Québec story. In addition to that, we have fully owned mega facilities which have the room to grow within.
In our flagship Valleyfield facility, we have 15 of 24 rooms active at this moment. We are also building out a EU GMP-compatible processing center, and we have room not only to meet our growing demand within Canada, but also support our international supply agreement with Curaleaf, one of the world's largest cannabis companies. In addition to that, this expansion is fully funded with our operating cash flow and a credit facility shared with two of Canada's leading banks, BMO and TD. Finally, we have alignment with shareholders. Over 50% of our company is owned by management and the board, so when shareholders do well, we do well. I will now jump into our cultivation and manufacturing assets. I will start with Valleyfield. Valleyfield is our flagship facility. It was built by a competitor for over CAD 250 million. There was no cost constraints there.
We had the opportunity to purchase that facility in 2021 for CAD 27 million, so 10 cents on the dollar. With that, we inherited more than just scale. Using our senior leadership software development expertise, we have built a proprietary climate control system that will allow us to take the individual grow rooms. That is one of the key differentiators as well with Valleyfield. It is not just one massive greenhouse. It is 24 individual grow rooms of 25,000 sq ft. With that proprietary software, we can control the climate, the nutrients that are going into our plants to match the genetics. That ensures that consistent high-quality flower is coming out at scale. In addition to that, we have the benefit of Québec's electricity.
We have one of the lowest rates within Canada, and as you can imagine, lighting is a huge cost contributor to growing cannabis. That is an additional advantage which strengthens our platform. If we look at our brands, that is the ultimate expression of our manufacturing and cultivation abilities. Looking at our three brands, we have taken those brands from 2021 we launched, and we have organically grown that revenue to over CAD 130 million. What is important about those three brands is staying focused so that our marketing dollars go further, our sales team has a clear story to tell, and as we enter into new categories, we do not have to go through the complexity of launching new brands. We are there to establish these brands as household names. If we look at the far left, we have Tribal. This is our flagship genetics brand, house of innovation.
With that, you have Canada's number one mass premium flower, 3.5 gram, as well as Canada's number one live resin. Live resin is an extraction process that we do in-house in order to capture the greatest margin. If we look at Nugz, this is our volume driver. We are looking at repeat purchase, looking at what trends are going on with consumers, and taking the moment to capture that revenue. We recently reached number one in infused pre-rolls in Canada. As well, we also have number one hash rosin, which is a premium extract. Then last but not least, we have Orchid CBD. Orchid CBD is about wellness, so it expands the occasions for consumption. We look to that brand as being the number one CBD flower year-over-year, in addition to being the number one CBD vape. I will now turn it over to Nicholas.
Great to be here, everyone. Nick, thanks for organizing the chat. Let's look at the financials. I think that this slide provides the real proof point behind the Cannara story. We have demonstrated that growth and profitability can actually coexist within the industry. With 21 consecutive quarters, as Scott highlighted, of adjusted EBITDA, 14 quarters of positive operating cash flows. That is incredibly rare, if you follow the industry, in the cannabis industry. Most recently, we delivered almost CAD 32 million in net revenue, as well as over CAD 8.5 million in adjusted EBITDA, which is an adjusted EBITDA margin of 27%. Again, quite rare in the cannabis industry. Naturally, the individual quarters will fluctuate depending on seasonality, the timing of shipments, et cetera. But I think the punchline is we are growing. We have expansion opportunities within the existing footprint that is fully funded.
I think the track record provides the foundation for what is going to be a very exciting next couple years for the company, as well as the industry. Our relationship with Curaleaf. For those of you who do not know Curaleaf is one of the largest, if not the largest, cannabis company globally. They do about $1.2 billion U.S. revenues, so that's more like 2.5, based on today's FX. In terms of their footprint, they have one of the largest footprints as an MSO in the U.S., as well as one of the largest, or the largest, international footprint, predominantly in Europe. I think that Cannara and Curaleaf bring together, with this arrangement, two complementary companies with complementary strengths.
We bring a high-quality premium flower production at scale, and Curaleaf brings the regulatory expertise, the supply chain expertise, the relationships internationally, and of course, the footprint to continue to scale our revenues internationally should we choose to do so and if the economics make sense. I think that this is more than just a financial arrangement or a supply agreement. It's a strategic relationship with the largest cannabis company in the world. And why I say that is because they are helping us with our EU GMP sponsorship in order to, hopefully by next year, receive certification, which could potentially expand additional opportunities internationally and margins as we scale with Curaleaf.
The initial agreement, and I think this is very telling, we signed the initial agreement in July of this year for CAD 21 million over two years. Subsequently, in only a few months, in October, we announced an upsizing to that deal to CAD 34 million. I think that really speaks to the flower that they had been receiving. It's high-quality flower at scale and consistency. I think that I would expect that in the coming years, that relationship could continue to expand because as you can imagine, to feed all of these countries, they require the supply, and we have that scale, as Scott mentioned, with the 24 rooms that we have at Valleyfield. In terms of our execution plan for 2027, it's fundamentally about doing what we say we've always done, and we've done that, and executing against a clear and funded growth plan.
We expect to invest approximately CAD 30 million, which, again, is fully funded by a syndicated credit facility with two of the largest banks in Canada. We're expanding processing first in a thoughtful manner, with cultivation to follow. By the end of next year, we expect 18 of the 24 rooms to be open, and we still have the remaining rooms to fund capacity, whether that's internationally or domestically. Of course, we look at that thoughtfully in terms of where the economics make sense, whether or not we should continue to supply the domestic market to maintain leading market share or expand internationally. I think that, again, this initiative provides several complementary growth drivers, more capacity, broader distribution domestically, and then international expansion and continued product innovation. Finally, I like to say a picture paints a thousand words.
I think this demonstrates how Cannara has differentiated itself in what has been an extremely challenging period for the cannabis industry. From my perspective, it's very straightforward what the value proposition is. It's a fundamental investment with a straightforward value proposition. We've demonstrated that we can grow revenue, we can grow profitability, positive cash flows, and build brands that resonate with consumers. As Scott mentioned, we've had the same three brands since day one. We've got the capacity, and it's substantial, and we have the capital fully funded to bring that capacity online in a very disciplined manner. The next phase is a continuation, again, of what we've already successfully done, expanding capacity as demand supports it, growing our market share domestically as well as internationally through our agreement with Curaleaf, and entering new international markets, again, if the economics make sense. Again, a very simple investment thesis.
Proven execution, funded capacity, and a clear path to continued growth. As we execute, I think that growth should translate into higher revenues, higher adjusted EBITDA, higher cash flows. I want to thank everyone for coming to our presentation. We'll turn over to you, Nick.
Okay. Well, thank you for that. Couple questions here to start off with.
Sorry.
Yeah, no problem. Nicholas, maybe just tell us a bit more about your background. What drew you to joining Cannara as CFO?
Is it on? Okay. I've been in the industry for well over a decade. You'll often hear me say that it runs in dog years. Candidly, I'm surprised I don't have a full head of gray hair. But what has always attracted me to the industry is the people. Because the industry requires folks who are hardworking, naturally intelligent, and want to build something together, and that's really what you get from the industry. I mean, what more do you want from a career than being challenged and working with great people? There's no shortage of that type of talent at Cannara. If you look at the business model, which we explained, I mean, 21 consecutive quarters of positive adjusted EBITDA, a strong management team, a clear runway to grow. I think that story is very, very compelling.
In addition to that, if you look at where the company is headed, it's at an inflection point. My vision is, again, to build on what the company has already done successfully, to continue to grow revenues, grow adjusted EBITDA, and scale the business both domestically and internationally.
Okay. For those that have seen the presentation before, you are probably used to seeing Niko Sosiak, who has moved to the COO role. Maybe just walk us through that, why you think that was the right move for him as well.
We can do that.
Oh, good.
Do you want me to take it?
You go.
All right. As Nick highlighted, Niko was the former CFO as well as the COO. I think, given where the company is at that inflection point, he's certainly the right person to move into that role. Not only does he have the financial acumen, he has the operational prowess from my perspective, and that's really a function of him being a cannabis connoisseur, as well as knowing the business, the operation cradle to grave, the pricing, the market. I think him and I, we're going to be great partners as we scale the business, and I'm looking forward to working with him as well as the rest of the team, and use the platform, of course.
Okay. The next question was about how Cannara, it's really one in Québec, but how do you take that model elsewhere? Is that specific products or specific regions where you think you would be successful in expansion?
It's working?
Press the button or just go?
No, just go.
Okay, perfect. Yeah, so Québec has always been our mainstay, and so often investors will look at Québec and say, "Okay, that's your story. What about the rest of Canada?" As highlighted, over 50% of our revenue now comes from the rest of Canada, and that comes from building through innovation, new products, looking at consumer trends. I mentioned Nugz having the number one infused pre-roll. That really was looking at the market and saying, "What is going on in infused pre-rolls? How can we come with the best offering on the market?" And that's how we saw us raise to being number one in Canada. In addition, we're looking at bulk flower. We've all heard about price compression in the cannabis space. It's dependent on the category. So look at 28 gram. Historically, there's a lot of price compression.
That has reversed, and we're seeing that change, and so with that, we can look at the market and say, "Let's now bring in 28 gram." That's a great volume driver, right? And so that's how we look at it overall is really just looking at consumer insights. What are our capabilities? We're vertically integrated, so we can ensure we keep the same margin and build on our margin quarter-over-quarter.
You guys are undergoing EU GMP certification, so what is the latest update on that? When do you expect to get it? Is that going to be a big unlock for the company as a catalyst in 2027, perhaps?
Correct. Yes, so within the Valleyfield walls, we have our 24 grow rooms, as mentioned, and then this processing center. So we are currently going through that CAD 30 million CapEx in total for fiscal 2027, and with that is the EU GMP processing. We are scheduled to finish construction in January. As mentioned, Curaleaf is our sponsor on that application. So between January, throughout that year, we expect to go through the inspection process, and we are hopeful by January 2028 that we will have EU GMP certification. Of course, it is a great unlock. Right now, our flower, it goes to a Curaleaf facility in Canada. We harvest it wet, and then transport it. Having it all internally is just an advantage.
Do you think you would still go through the Curaleaf channel, or would you start doing it yourself as well?
It would be through ourselves.
Okay. You guys are generating cash. The CapEx plan is pretty light in terms of the cash required. How do you see yourselves allocating cash, whether that is buybacks, dividends, paying down debt?
Just for context, the company did announce a NCIB, which is a share buyback program back in August of this year. It permits or authorizes the company to purchase approximately 2 million shares. We view the buyback or capital allocation through the lens of any investment decision, right? Where the next dollar is going to generate the highest risk-adjusted return. As we highlighted, we are spending CAD 30 million. So we have a lot of use for our cash, whether it is investing in the cultivation facility, the processing facility, buying back shares, improving our working capital, or strengthening, which from my perspective is already a very strong balance sheet. So in terms of the decision-making sort of a decision tree, it is really just an economic model weighing against what is going to generate the greatest risk-adjusted return. From my perspective, the focus, again, is very simple.
It is build out the CAD 30 million, scale that business, and hopefully grow revenues against visible demand, both in Canada and domestically.
Okay. Thank you. Can you remind us of the long-term goals for opening up new grow zones or grow rooms, and why can't you just go faster? If that makes sense.
Yeah, I think it is fairly straightforward. Like I said, one of the main reasons I joined the company is not only the team, but their ability to execute with discipline. I think that when you are approaching capital allocation, whether it is the grow room or the buyback of the shares. In terms of the grow room, you want to do that against visible demand. So we have, call it 4.5% market share domestically. We just entered into an amended CAD 34 million supply agreement with Curaleaf. I think that it is fairly straightforward. Against visible demand, model that out, and allocate depending on where the highest risk-adjusted return is generated internationally as well as domestically. To be very clear, we are not looking to sacrifice the domestic business. We have won in Québec.
I think we will continue to win as we scale nationally, and then we are going to assess sort of incremental international revenues as they arise, but without sacrificing what we have done well in Canada, which is sort of building our domestic market share, starting with Québec and then scaling nationally.
Perfect. Okay. Maybe more of a philosophical question, but what are some of the comps that you respect in the cannabis space or even outside of the cannabis space? What companies inspire what you are building at Cannara?
Yeah, I think today you have seen a great selection of cannabis companies in the space. Obviously, we respect those who know how to grow and scale with demand. In addition, using their capital efficiently. Beyond that, it is that consumer-driven product innovation, which is extremely important. I think you have seen a lot of those faces today. Outside the space, as a former marketing guy, at Cannara, I definitely look at other brands, of CPG brands. One that comes to mind is Mid-Day Squares. It is a private company based in Montreal, and their angle is to make sure that consumers understand who the founders are. It is a brother, a sister, and a husband. They have brought their brands together so that people are not only making the choice at the cash, but they are thinking about the brand beyond just the packaging and what they are seeing.
We often look that way to see, what is going on in the CPG space, because ultimately, we are a CPG product.
All right. We will open it up to the audience here. I know I have a few more, but let us get some new questions here.
When I visited the facility, I think it was two and a half years ago. If it was not, it was a year and a half. I remember walking on the operations, there was a second floor, which was hundreds of thousands of sq ft, if I remember correctly. What do you intend to do with that?
Yes. As you mentioned, we have those 24 grow rooms. That is the greenhouse, and you have seen building it out.
Yeah.
And then now in that processing center, when you would've seen it was probably crushed rock, and it really was a kind of a skeleton. There is a rooftop greenhouse. Our main goal right now is the EU GMP processing down below. Then we'll see after that. It really is the icing on the cake of what our flagship facility is. We have that rooftop. It's currently set up like some of the more classic greenhouses, where it's not individual grow rooms, so we'll have to consider that. But it really comes down to the same principle of scaling with demand, right?
And one other thing. Under the NCIB, sorry, maybe you've mentioned this already, but how many shares have you bought back or?
Since August, so don't quote me on this, but the stock is trading at about two bucks.
Yeah.
From our perspective, that is certainly lower than the intrinsic value of the company.
Yeah.
Probably about 10,000 shares a day at CAD 20,000. So CAD 600,000 a month over a couple of months. So call it 1.8.
10,000 shares since the beginning of August or end of August?
Yeah. So that would be the. I guess 10,000. I will kick off there. The max that we can do per day is 10,000. It is variable day by day, but we are definitely actively buying.
Yeah.
With the rules. Obviously, we have a third-party broker.
Or did you for major cost?
Yes. And so we're following that through, and we're actively purchasing, given the value of the shares.
I should point the questions over there, Noah.
I know I have all the numbers in front of me here, but the CapEx plan you laid out is pretty clear. Margins feel relatively predictable. The one thing when I looked at this company versus year-to-year was that I noticed the working capital intensity of this business is a little heavier. Again, I think impacting capital expectations going forward. My question is the problem related? Is it customer related? Maybe something with, I guess maybe there's something to do with.
Yeah, sure. It's a straightforward answer. Excise taxes, if you're not familiar with the industry, they run in the range of call it 32%-35%. It really comes down to quarter-end excise tax payments, which obviously sucks up a bunch of cash. Otherwise, I don't think there's anything I would highlight.
Nothing from inventory perspective?
No. We're going through our year-end. Obviously, I can't speak to what that's going to produce, but one of my mandates is ensuring clear visibility over inventory on a weekly or daily basis. We haven't identified anything. If you look at our turns, I would say they're consistent with the industry. It's a complex business, but we ensure that inventory doesn't build, and we have the capacity as well as the product to feed domestically as well as now internationally.
Okay.
Yeah. I guess one of the largest sort of growth catalysts in the last year was the launch of vape products in Québec. What was your participation in that, and how is that falling and evolving, seeing that it's a brand-new category in that province?
Yeah, great question. I should repeat the question, I forgot to do that earlier on. Asking about the vape portfolio in Québec. Vapes have been close to our heart since the beginning, launching live resin in the rest of Canada. We have maintained number one position year-over-year. We have matched that same experience within the province of Québec. We were awarded a number of SKUs, which allowed us to not only have a greater presence on the shelf, but also the quality of our product has obviously tested and come through with the consumers in Québec. They recognize the quality. It is a 30% cap, so it is a different vape product than you have in the rest of Canada, a 30% THC cap. But it is something where that comes from innovation and being vertically integrated so we can produce a high-quality vape with that cannabinoid profile.
From there, we have maintained number one since launch in December.
What is your market share, about?
In vapes?
Yeah.
Roughly in the vape category itself, we are about 11%, if I am not mistaken. I would have to double-check the numbers, but we have maintained number one position within the vape category since. Within Québec, yes. In Québec, it is almost at 25% or so. Thank you, Seb. Appreciate that. We are about 12% overall market share, within the vape category, 25%, which matches our SKU share of shelf.
Just on the Québec thing, too.
Is there any potential in, Québec is sort of back behind the curve in edibles as well. Has the SQDC reached out in terms of plans for making a go in that category as well, just like they have in vapes in the last year?
Yes. Great question. I am getting a request to wrap up, but I will quickly answer that question. In terms of edibles, you are right, Québec has been conservative on that side. We do have beverages at 5-milligram potency, which is unique to the market. Overall, it is not the lowest-hanging fruit in terms of revenue, right? It is a much smaller share of consumer spend in Canada, and we expect the same. We did have one small collaboration in Ontario for beverages. It was a marketing collaboration to test the market. To be honest, the margins quite often are small for edibles, given the need of a CMO, et cetera. So it really has not been our main priority. Noah? I guess we are completely out of time. Noah, we will chat later. So we are at table 13, guys.
It would be great to meet you either today or tomorrow on our one-on-ones. Thank you.
Thank you. Let's work.