Cannara Biotech (LOVFF): Gaining Share in the Canadian Cannabis Market

In this episode of the WTR Small Cap Spotlight, Cannara Biotech COO and Interim CFO Nick Sosiak joins WTR's Linda Bolton Weiser and Tim Gerdeman to discuss the company's expansion following the announcement of a long-term international supply agreement with Curaleaf carrying a potential aggregate value of up to C$21 million. The conversation covers Cannara's differentiated approach within the cannabis industry, the market positioning of its three brands, the scale advantages of its two Quebec mega-facilities, growing room economics, the current state of the Canadian cannabis market, the role of innovation in driving share gains, and the path to reaching maximum annual production capacity of 100,000 kg. 

Transcript

SPEAKER_00 0:01

Welcome to the WTR Small Cap Spotlight Podcast. I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research. In today's podcast episode, I'm being joined by Nick Zozziak, COO and CFO of Canara Biotech. Also joining is my WTR Equity Research Colleague, consumer analyst Linda Boltonweiser. Canara Biotech, Toronto Stock Exchange Ticker Symbol, L O V E, OTC QX ticker symbol, L O V F F, and Frankfurt Stock Exchange ticker 8CBO is a vertically integrated producer of affordable premium grade cannabis and cannabis derivative products, rather. The company owns two megafacilities in Quebec with 100,000 kilograms of potential annualized cultivation output. Leveraging Quebec's favorable energy costs, the company maintains an efficient, low-cost production model. The company's products are available in about 50,000 points of distribution in Canada, and the company is rapidly gaining market share, now ranked number eight with a 4% share of the national retail market in Canada. Good morning, Nick and Linda, and thank you for joining today's podcast. So to kick things off, Nick, when you talk about the company's growth strategy, I've noted in the past that you emphasize that the company is different from your competitors. You have a measured approach to expansion and focus on product quality and profitability. Can you give us more color on how your strategy is unique and why it is leading to market share gains, please? Absolutely, Tim.

SPEAKER_01 1:38

We live by the word focus. We live it, we breathe it, we focus every day of our operation, and we really lead from the top down. I was I'm CFO, we're actually in the process of uh finding an interim, uh a CO a replacement CFO. And um I'm I've been hands-on in the company for the past six and a half years, um, from the ground up from building our first facility all the way to where we are today with over 200 SKUs. And our CEO, who's the founder and president of Canara Biotech, uh, is still uh our president, still CEO today, uh, and is our master grower. Uh he's in the operations every day learning how to grow consistently and and the most quality we can at Canara. And that differentiates from any other business. There's no playbook in cannabis right now for large-scale cultivation. We need to, we're in it. We're we're creating that, we're in that learning curve, we're writing that playbook for that in a couple of years it'll you know all the SOPs and will be set. So uh we really put a lot of love and passion in our work, and we've been doing that um you know ever since we created the company and live by the you know prol walk-run approach. Uh we built our first facility, we invested in our first facility, we launched in Quebec, uh was our first market where we're uh where our home base is, and we quickly became number one in that market uh because of the quality and consistency consistency that we have built into our operation. And then what changed us really and put us on the map was uh the acquisition of our second facility, the Valley Field facility. This is a million square foot purpose-built cannabis hybrid greenhouse. Um, and that's really, really key is purpose-built versus any typical greenhouse because cannabis cultivation, although it's a weed and it can grow, you know, people think it can grow like a weed, um, to gain that consistency and quality of the product requires very precise techniques and cultivation uh protocols, uh, which require a very precise facility. And the Valley Field facility was built for over $250 million, and in 2021 we bought it for $27 million. So that asset is prized to us and is really put us on the map. We built it up, you know, we had access to 24 rooms, 24 zones of 25,000 square feet, allowing us to get to 100,000 kilograms of cannabis or a million grams of cannabis sold in a year. And instead of turning all 24 rooms, we turned on each room as a separate zone, as a separate facility one by one. And we started that in 2021 with one room when we bought the facility, and now today we're at uh room 14. And we have a two-year plan to get to room 24 from here, and um that's that that diligence and focus, especially also in the fact of where we're targeting our our our product. A lot of volume got shifted internationally for you know higher priced product and better margins, and we still kept our focus in Canada and we're still focused over the next two, three years to keep growing in Canada and become a you know number one uh or top three player in in Canada.

SPEAKER_00 5:15

Okay, thank you. That was a very helpful uh overview, and I have to say that's a remarkable discount you purchased that facility for. So well done. And with that, I'll turn it over to Linda.

SPEAKER_02 5:24

Thanks, Tim. Um so Nick, um, let's just step back a little bit and can you talk about the dynamics of the Canadian cannabis market? Um my understanding is it's growing around six to seven percent per year. And maybe you could just outline the main segments of the market and how you're positioned with your three brands. And what do consumers consider when they make their purchase choices? And how's the pricing trends in the industry?

SPEAKER_01 5:52

Yeah, so it's been a roller coaster for sure. Pricing trends in cannabis has been a roller coaster for starting with overproduction. Uh, and I think with a lot of CCAA's closures of a lot of production facilities, the significant growth in international cannabis two years ago we were selling 40,000 kilograms internationally. Now we're over 150 to 200,000 kilograms of cannabis getting exported from Canada to internationally. Uh so we we went through a whole roller coaster, but I feel like we've been we're we're at the bottom and now we're climbing back up uh in terms of price. Uh I've seen uh we'll go into my brands in a little bit, but we're again very focused in how we target our our products. And one huge volume driver in any cannabis market is large format um dry flour. So 28 gram packs, um they sell for the discounted the lowest margin, but they move a significant amount of volume. And for the longest time, no matter how I worked my numbers, I could not get it priced to an appropriate gross margin that I felt comfortable launching a 28-gram product. So we built our um, you know, out of that 100,000 kilograms, we're at like 55,000 kilograms produced and sold. We have minimal, I think I have one or two SKUs that are 28 gram bags. Um so now I've recently re-revisited that SKU and I've noticed my competition increasing prices uh because they can no longer um, you know, they used to buy cannabis from another producer and then sell it, you know, for 10 cents, 20 cents margin, uh, but that supplier no longer exists, and then prices of wholesale start to come up, and then they can't afford to lose money on that product and they discontinue it. So I've seen I've seen that shift, and and we're for the first time launching a couple of you know, two, three now new SKUs in the in the large format uh category, which is uh which moves significant amount of volume even with so few SKUs. So that's our next leg of growth. Um overall, I think we're in a very healthy position in the Canadian market. It's heavily regulated. Uh we used to be a lot of players. 80% of the market now is held by the top 10 uh players. Um so it's a it's a small it's a small group, and now it's you know survival of the fittest uh and who can innovate and keep producing better quality product. Innovation is key in cannabis, who's finding the next new products and the next new genetics and uh and who can keep the numbers working. And as we grow, we're at the halfway point in our business, we're still achieving economies of scale with our facility, right? So not only are we seeing price compression turnaround, uh we're also seeing economies of scale on our side, which allows us to compete even better into these categories. Uh so that's uh overall, like the the market's extremely healthy, like you said, five to seven percent growth per year. I think that's that's where we're we're seeing over the next couple of years. There's not going to be a huge inflection point over the course, but you know, five to seven percent a year. Um it's really about like you know, between dried flour, pre-rolls, and extracts, vapes, we're pretty much 33 to 40 percent, uh, 30 to 40 percent across each category, uh, plus or minus. So we play in all those main categories. We're not really in edibles and beverages, they're a very small percentage of the market. Uh we play in dried flour, we play in pre-rolls, which is a growing market, especially in fused pre-rolls. Um convenience is really key. Uh, all-in-one devices for vape extracts. Uh we we definitely are innovating and leading charge. We're building, we're growing the we're growing the product production and we're processing everything in-house, which very few players in in our industry are doing it fully vertically integrated. And um we have three flagship brands. What's unique about us is that we created these three flagship brands in 2019. I started the company, I remember creating those brands with the marketing team. And these are the three still same three brands that scale from zero to $140 million plus revenue, right? So uh Tribal is our main flagship brand. Uh, it's all about genetics uh in cannabis, unlike alcohol or tobacco, where the consumer kind of goes through their navigation of product and then chooses their product. Of course, they have you know special products for special times, but their daily consistent product is usually the same product uh in tobacco or alcohol. In cannabis, the way the cannabinoids and your endocannabis system works, uh uh you need variety. The customer after a while will stop to experience the same experience that they had with your product, and that's just naturally occurring. So you need to be always there for that customer with the next type of product that's going to re-give them that experience that they're looking for. And then that that existing product is such such high quality and consistently produced that when they're tired of that second product or third product, that they come back to the first product because they liked it so much and they re-get that feeling again. Because uh, you know, cannabis is all sorts of terpenes, your body has the endocannabinoid system, those terpenes attached, your body gets used to it, it needs another blast of terpenes to kind of to reset and forget about it and then go back. So we need to understand that. That's what tribal understands, finds these genetics, phenohunting. And phenohunting, I've said it in many podcasts, is key to any cannabis' company success. Uh, you know, you you could, it's it's it's the ultimate what's behind the product that you're selling, right? So if ever if you're taking the same genetics and seeds that everyone else is using, well, you're gonna end up, no matter how well you do your your cultivation cycle, with a very similar product as the rest. Um so going through these genetics and finding this, there's no, you know, there's maybe one or two sources out there that are doing that for other LPs, but then again, you're all LPs are gonna be licensed producers, are gonna be going to that same source and ending up with the same product. So there's no playbook for that genetic search. So we have to do it. So that entails carving out revenue rooms that we're saying, okay, well, these are not generating revenue for the moment. And we plant seeds and we from all over the world that we're looking for, and we go through a four-month process to grow that genetic, test it, evaluate it, regrow it again to make sure it grows again, and then commercialize. So that's a year and a half process just to find these new genetics. And the market's always wanting them every year, right? Some multiple every year. So that process is very key to a cannabis uh company, and we're really focused it on it, and that's what my tribal brand is. My Nuggs brand is focused on large formats of more value, same quality. We never we don't really have a different quality proposition. It's all highly quality and consistency. It's just that tribal focuses on genetics, NUGS formats on big bulk formats, larger formats to give even better discount. And Orchid is our wellness brand, more focused on CBD products.

SPEAKER_02 13:20

Great, thanks. Um so recently um the company made an announcement that you got a um a supply agreement with CureLeaf, more than $20 million. Can you explain how this affects your expansion strategy and what does the capacity ramp-up look like? And maybe you can share some of the economics behind it, like CapEx requirements and revenue per room or zone?

SPEAKER_01 13:46

Absolutely. So um CureLeaf, as I'm sure well you're well aware of and your viewership is well aware of, if uh they're focused on the cannabis industry, is one of the largest cannabis uh companies in the world, uh focused in the US and international markets. They don't um they don't have uh they have a small establishment in in Canada for EU GMP. Um but they are a large uh large cannabis company and focus on international markets while we're focused on the Canadian market. We also got a huge facility, a $250 million plus facility for $27 million, and we have a crawl-walk-run approach to development. So um and our focus is on Canada. So where that partnership came to be is that we do have unutilized capacity, not because we you know we have a plan later for it, but in our short-term frame, if we're looking, we we have unused capacity and we're building into it and we want to move it all along. So we were always looking for a partner to help us explore what phase two would look like for Canara. Uh once we dominate um the Canadian market and we're fully built out uh for Canada, uh there will be have to be a phase two for Canara, which is international markets, the US markets. We will have written that playbook of large-scale cannabis production, scalability, genetics, brands proven out, uh, and we will have that playbook to go international or to go to the US. So we were always looking for a partner that would allow us to gain that knowledge and help us figure out how the international markets work while keeping focus in Canada. And that's where Cure Relief is to us. Um they're a great partner where uh they committed to $20 million over the next two years of cannabis. Uh they've evaluated every cannabis, we've ship it, it's for international markets. Uh, so we're growing it, we're sending it to them internationally, and they're uh able to fulfill their SKUs with high quality, consistent um cannabis. And at the same time, uh that allows us to take generate revenue from unutilized capacity that we work growing into and reinvest in Canada, in addition to them being our sponsorship for EU GMP. And uh EU GMP is a key certificate uh that is only given uh by existing holders of EU GMP um to facilities in Canada that allow the export to international markets. And Canada right now is one of the few international hubs for export of cannabis. So this EU GMP license uh they're gonna be our sponsor and they're gonna help us um give us the application to license Valley Field, our our our whole drying process, 200,000 square feet of GMP licensed um uh drying capacity and processing capacity that eventually we'll be able to utilize uh to send even more cannabis international um and figure out our phase two of what does Canara look as an international entity.

SPEAKER_02 16:55

Right. Um so Nick, you you have a pretty healthy balance sheet. Um you've got in the last quarter, I think it was over 20 million of cash, and you've got some debt, but a pretty low debt to EBITDA ratio of just about 1.2 times. Um I'm curious what your plans are for your use of excess free cash flow because it sounds like you can actually fund your growth internally. So what what do you plan for the excess cash? Is is there any MA in your plans or um share repurchase? Uh what what are your thoughts there?

SPEAKER_01 17:31

Yeah, so we just announced uh uh an NCIB, uh share repurchase program over uh the course of next year that uh the company is gonna be uh going into. Uh but more more focused is our CapEx investments uh in order to double the growth. Again, we're at 55,000 kilograms produced, uh 58,000 kilograms uh that we just turned on. We were at 12 rooms, we just turned on two rooms in the past two months. So we have you know, we can scale to that 24 rooms that requires CapEx for those rooms to scale in. They're already built out, so it's it's not much capex, it's about a million dollars per room. Uh and each room can generate over $10 million of revenue uh within the year uh it's uh it's turned online. Uh so so you know we have 10 rooms to to turn online uh over the next uh course of the next year to two years. And um even if you turn on your rooms, and what you know super, super important and what a lot of growers and cultivators forgot is the dedicated space to drawing and post-processing the cannabis. You spend three months growing the cannabis and all you know, investing all the money to grow the best cannabis that you can, and all that could be put into garbage if your drying process does not work. Um so you need large rooms, yeah, especially for the scale that we have. Um so you need a lot of square foot, um, and that's why we have a 200,000 square foot processing center dedicated to all these 24 rooms. Um we invested about $10 million in 2026 in that project, and there's another $20 million to invest to turn on all the drying rooms and all the processing rooms and double our extract capacity and you know trim the 100,000 kilograms. So between that and the um the the actual cultivation zones, you know, we're looking about 30 to 30 to 35 million dollars of uh additional capex that we're going to be investing into the operations. And then on the MA side, I mean, find me another 10 cents on the dollar facility will be in the market all day long to uh to buy it up. Uh but otherwise where we we have that you know the tunnel vision of focus on execution of the value field plan and MA opportunities do fly across our desk every single day, and we evaluate them and we look at them, but you know, we're gonna be value investors for any MA activity.

SPEAKER_02 20:15

Okay, makes sense. Um stepping back again a little bit, just to close on um sort of a bigger issue in the United States here, um, there's um some actions being taken uh for the possibility of cannabis switching to a to a Schedule II drug from a Schedule I. Do you have any opinions about whether that will happen, any timing? And if it were to happen, how would that affect your long-term strategy?

SPEAKER_01 20:44

Yeah, I'm just a Canadian north of the border. So um the the uh the amount of um press and stories I've heard and rolloposters again, I've been on trying to follow uh if this is gonna pass or not. Um, you know, I just uh I kind of gave up and uh and I said uh let the what will be, when it will be, it will be. Uh we have we have a plan for the next two, three years to focus on Canada, build out Canada, build out the the 100,000 kilograms, sell it in Canada, build out that playbook that I keep talking about, because again, this is there's not many companies out there in the world building out that size scale of cannabis production that's cultivating. Because you could sell cannabis, but if you can't cultivate high-quality cannabis and consistently and innovate on genetics and control that supply chain, it's extremely hard to build a cannabis CPG business. So I think we're one of the few that are building it all as a fully vertically integrated platform, and we're doing it right. And I think that that's going to be transferable to other markets across the world. Which markets, when, where, how, that's all left up to time right now. Uh we have that in the playbook. Focus, build it out. If US legalizes it next year in two years, still focus on Canada. Once we focus, finish Canada, then US would probably be the next market. But if not, then it's there's so many international markets to continue expanding, and then when the US decides to open up and we finish in Canada, we would be there to uh to build our uh to set our footprints in there.

SPEAKER_02 22:30

Great. Thanks, Nick. Um it's been very informative and a very interesting discussion. Thank you very much for joining us. Tim, back to you.

SPEAKER_00 22:39

Thank you, Linda, and Nick, thanks so much for joining us today to discuss Canara Biotech. Very interesting story, and wish you the best in the uh back half of 2026 and continuing to grow.

SPEAKER_01 22:49

Thank you, Linda. Thank you, Tim, for having me. It was a pleasure.

SPEAKER_00 22:54

Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules. We will see you next time for another edition of the WTR Small Cap Spotlight Podcast. Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.