In this edition of "Rising High," The Fly conducted an exclusive interview with Nicholas Sosiak, chief financial officer of Cannara Biotech (LOVFF), a vertically-integrated producer of premium-grade cannabis and derivative products. Here are some highlights:
CANNABIS CULTIVATION: Cannara is a vertically-integrated cannabis company focused on producing premium-grade products for the Quebec and Canadian market. The company owns two Quebec-based mega facilities spanning over 1.65M square feet and providing Cannara with 125,000kg of potential annualized cultivation output.
“We started in 2018, bought our first facility in 2019 and our second facility last year in June,” Sosiak said. “At the heart of our ethos, we knew that we needed to be vertically integrated because our main objective was to grow premium-grade cannabis and cannabis derivatives.” To deliver that value proposition to the market, Cannara would either have to rely on other cannabis producers or grow cannabis on its own, he said, and the company chose the latter. “We learned quickly how hard it was to grow that kind of cannabis at scale and to achieve quality,” the CFO said. “That was our main objective of being vertically integrated, to ensure that we’re controlling the vertical and the premium quality aspect of the product. That’s really what propelled the company.” From there, the company acquired assets, built brands and developed products and SKUs, he said. “But at the core of Cannara, it’s really about being expert cultivators,” Sosiak said.
COMPETITIVE EDGE: When asked about the company’s key differentiators, the CFO pointed to Cannara’s vertical integration as the first competitive edge. “We’ve controlled the cultivation aspect from the get-go of the company through the outreach of our brands and products to customers,” he said. Looking at the Canadian industry, Sosiak noted a slew of companies rushed to cultivate cannabis and create products amid legalization. “They created these brands and they hurt consumer perception because they were not delivering quality or the price was not reflective of the quality or their value proposition,” he said. “By Cannara controlling the vertical and focusing on premium we really differentiate ourselves. We’re so focused on quality every time a consumer opens any of our brands.” The CFO said Cannara is continuing to build on that momentum through innovation and the introduction of new genetics, formats and concentrates. “It’s about being in tune with what the market wants,” he said. “And then the last piece is our price. We’re very, very price competitive and we have extremely competitive value propositions.” Cannara’s ability to grow premium cannabis matched with its ability to understand the market and create products that consumers want leads to a very strong value proposition, he said.
Q1 EARNINGS: In January, Cannara reported s first quarter loss per share of (C$0.01) on revenue of C$6.6M, which compared to a loss per share of (C$0.01) on revenue of C$1.37M for the same period last year. The company also recorded a gross profit of C$3M before fair value adjustments and achieved its third consecutive quarter of positive Adjusted EBITDA.
“We’re in 40%-50% gross margin, which is a feat in the cannabis industry,” Sosiak said. “Ever since we started our retail operations in February of 2021, our three quarters from that point on have been that stable gross margin and revenues as well as a positive adjusted EBITDA as we’re scaling and growing.” The results show Cannara is stabilizing the business, building the company for growth and keeping it profitable, he said. “We also just acquired the Valleyfield facility, which is going to significantly change the profile of the company,” the CFO said. “I’m excited because looking at Q1 of 2022 and Q4 of last year, we’re working on more than doubling our growth during those quarters with 2 of 24 zones at our Valleyfield facility, yet were still able to achieve positive adjusted EBITDA during those six months.” He said he expects the company to continue building organic growth and showing more positive results.
VALLEYFIELD FACILITY: In September, Cannara announced it had received a cultivation and processing license for its Valleyfield facility, a recently acquired greenhouse the company has been repurposing as an indoor facility. “It’s going to add significant value,” the CFO said. “We acquired the facility from The Green Organic Dutchman in June of 2021 for $27M and they built it for $250M. It’s a 1M square foot facility, with 600,000 square feet of greenhouse space.” The company acquired the site as Cannara’s products from its Farnham facility were all selling out, he said. “As soon as we went to market in February and March, our production was ramped up full-scale and we were selling everything,” Sosiak said. “We couldn’t be on the shelves for more than two days.” The company considered whether to build organically as the Farnham still has a lot of square footage, he said, but Cannara ultimately decided it would take too long to license and process it. “We found a beautiful facility in our backyard that was built for cannabis in mind as state-of-the-art,” he said. “Basically we have 24 zones right now in our Valleyfield facility and one and a half zones is equivalent to all of our Farnham facility. Every room and a half that we turn on, we’re doubling our growth, which is going to be very, very interesting to see in the next couple of quarters.”
QUEBEC OPERATIONS: The company currently operates its two mega facilities in Quebec and Sosiak noted Cannara benefits from the low cost of electricity and labor in the region. “It really allows us to execute our strategy of providing high quality product at a very competitive price,” he said. “We’re mainly passing down those cost savings to the consumer and we’re able to execute that because we’re in Quebec.” The CFO added having the two mega facilities about an hour away from each other also creates staff synergies for the two locations. “They can leverage each other,” he said. “It becomes very interesting to have both facilities close by, utilize them, have them synergize and then take advantage of the low cost that we have here in Quebec.” When looking at growing operations, Sosiak said the company already has enough on its plate with the Valleyfield facility. “We have 24 rooms to turn on with 25,000 square feet each,” he said. “We’re already on room three of 24, so it’s going to be a good year/year and a half to get all 24 rooms open and then we have a 200,000 square foot rooftop greenhouse that we have room to cultivate in.” The CFO noted Cannara also has a 250,000 square foot processing center in Valleyfield for cannabis 2.0 products. “We have all the assets we need and plus we have another 475,000 square feet at Farnham to turn into cultivation right now,” he said. “Really the expansion is going to be all organic. Cannara acquired all assets to grow organically, take over and grab as much market share in Canada.”
CORONAVIRUS: Coronavirus has impacted many companies in the cannabis industry globally, however Cannara was lucky to see minimal impact amid the first few waves of the pandemic, the CFO said. “Cannara had precautions in place and we already have a pharma-like facility,” he said. “Everyone is geared up as soon as they come in and they don’t take off their masks throughout the whole facility. We also implemented new protocols to ensure that we were safe and we had very limited cases.” Looking at the industry, Sosiak said he believes coronavirus benefited the space as dispensaries were deemed an essential business. “More people are staying at home and more people are starting to consume or increasing consumption,” he said. “That’s a trend we’re continuing to see.”
FLOWER VS. DERIVATIVES: As technology advances and delivery systems for cannabinoids become more diverse, Sosiak said he expects flower and vapes to continue to hold big shares of the market. “I usually take the trends from the U.S., the California and Colorado markets,” he said. “You would think that eventually flower would start decreasing but it still seems to be close to 70% of the sales in the cannabis space.” The CFO added concentrates are currently priced premium right now, but the category is going through a price compression phase similar to the flower market. “As price compression happens, people may shift towards concentrates but I’m not sure because I do see that bulk of the volume in dried flower,” he said. “Flower seems to always reign supreme. As price compression comes and there’s a couple more years of consumers getting used to dried flower, experiencing that and then saying, ‘Okay, well I need something else or I need something more potent’, then they’ll do a shift to concentrates.” In terms of concentrates, Sosiak said he expects the biggest delivery system to be vapes. “That seems to be the second biggest category,” he said. “It’s actually beating pre-rolls right now in Ontario. Vapes will definitely reign supreme. It’s just a matter of formulating it and getting the perfect vape pen and pricing out there to grab a lot of market share.”
CHALLENGES: When asked about the largest hurdles facing the cannabis space, the CFO cited overgrowth of large companies in the industry, which now face the challenge of reorganization. “That hurt consumers and consumers didn’t get the best experience,” he said. “Now you have these companies that are building all these brands with bad product inside and it just created a vortex of confusion here in Canada.” The challenge is going to be the mergers and acquisitions phase, Sosiak said, with the space going through consolidations, bankruptcies and delistings. “There’s going to be some reigns, some kings that fall and some bishops that rise,” he said. “I think there’s an inflection point right now in the Canadian cannabis industry that you really have to execute. You need to show profits because you’re not going to raise money or capital on future opportunities or ideas anymore.” The CFO said he expects the next two years to shape the industry as big cannabis companies are forced to reinvent themselves or shutdown. “Hopefully there is going to be a couple of players out there that are going to own the industry and make it what it should be.”
OPPORTUNITIES: As the cannabis industry develops and matures, Sosiak said Cannara is most excited about executing its growth plans and turning on its Valleyfield rooms. “We’re growing in large-scale really fast and it’s exciting to see,” he said. “My next harvest from Valleyfield will be 220,000 cans, so it’s going be interesting to see how I get to open up to different markets.” The company is currently only distributing in Quebec with very limited sales in Ontario, the CFO said. “Opening those distribution channels and seeing consumers enjoy our product is going to be exciting as well as just continuing innovating and bringing new genetics and new products to the markets,” he said. Looking at the space as a whole, Sosiak said there is still a huge opportunity for cannabis companies to grab market share. “Current players in the industry have market share because they produce the only products that are available and priced right,” he said. “That’s why they have 20% market share, but quarter-after-quarter, they’re losing market share. Consumers are ready to shift, they’re just looking for the correct value proposition and I think here at Cannara we have it.”
OTHER CANNABIS/PSYCHEDELIC STOCKS: Other publicly-traded companies in the space include Acreage (ACRHF), Akerna (KERN), Aleafia (ALEAF), Atai Life Sciences (ATAI), Awakn Life Sciences (AWKNF), Audacious (AUSAF), Aurora Cannabis (ACB), AYR Wellness (AYRWF), BC Craft (CRFTF), Body and Mind (BMMJ), CanaFarma (CNFHF), Canopy Growth (CGC), RIV Capital (CNPOF), Clever Leaves (CLVR), Columbia Care (CCHWF), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), CV Sciences (CVSI), Curaleaf (CURLF), CURE Pharmaceutical (CURR), Delic Holdings (DELCF), Delta 9 (DLTNF), Emerald Health (EMHTF), Fire & Flower (FFLWF), Flora Growth (FLGC), FluroTech (FLURF), Gage Growth (GAEGF), General Cannabis (CANN), Goodness Growth (GDNSF), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Harborside (HBORF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), Inner Spirit (INSHF), Innovative Industrial Properties (IIPR), InterCure (INCR), Ketamine One (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen Enterprises (MMNFF), MJardin Group (MJARF), Neptune Wellness (NEPT), NewLake Capital (NLCP), Thermic Science (ENDO), Organigram (OGI), Planet 13 (PLNHF), Relmada Therapeutics (RLMD), RYAH Group (RYAHF), Skye Bioscience (SKYE), SLANG Worldwide (SLGWF), Sproutly (SRUTF), Stem Holdings (STMH), Small Pharma (DMTTF), Sundial Growers (SNDL), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Valens (VLNCF), Village Farms (VFF), Wesana Health (WSNAF), Entourage Health (ETRGF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).