Leef Brands Inc. (LEEF) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Leef Brands Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that, today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jesse Redmond, Chief Strategy and Investor Relations Officer. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Welcome to Leef Brands Second Quarter 2026 Earnings Call. Joining me today are Micah Anderson, our Chief Executive Officer; and Kevin Wilson, our Chief Financial Officer. Please note that today's discussion will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from what we discuss today. For a full discussion of these risks, please refer to our filings with the SEC and SEDAR+ as well as the Investor Relations section of our website. On today's call, Michael will begin with an overview of the quarter. Kevin will walk through our financial results in more detail. Michael will then return to discuss why we are so excited about Leef's future. With that, I'll turn the call over to Micah.

Thanks, Jesse, and good afternoon, everyone. I want to start with the progress we made during the quarter and why it validates the strategy we have been building toward. We completed an oversubscribed $9.3 million financing to expand Salisbury Canyon Ranch and strengthen our balance sheet. We acquired Himalaya Vapor Company, giving Leef an established California concentrate brand. We filed multiple applications for DEA registration and began the largest harvest in the company's history. Since the quarter ended, we have completed that harvest and started processing the material. The first several hundred liters produced in July represent the best oil we have ever produced. Our distillate passed California's elevated CAT4 pesticide screenings and tested at approximately 95% THC and 99% total cannabinoids. These results are better than last year, and represent what we believe to be the highest quality oil on the market. We continue to make steady progress towards building out all 180 acres of Salisbury Canyon Ranch. This spring, we added 14 new acres, bringing cultivation to approximately 80 acres and are preparing to plant an additional 21 acres this fall. This will bring the total canopy sides closer to 100 acres in 2026. To further secure our biomass supply, we entered into a supply agreement with a long-term farming partner for an additional 21 acres at a cost structure similar to Salisbury Canyon Ranch. We have already harvested the spring crop at this other location and are in the process of replanting these 21 acres for an additional fall harvest. Together, we expect this production to carry us through to the 2027 harvest and prevent another biomass gap. In my opinion, Leef has never been in a stronger position. Now let me address the temporary softness in revenue during Q2. On our Q1 earnings call, we told investors Q2 would be softer. We have exhausted the material from our 2025 harvest at Salisbury Canyon Ranch and returned to purchasing biomass from third-party farms, while we waited for this year's harvest. And that's exactly what happened. When we run our own material, we control cost, quality, consistency and timing. When we buy biomass on the open market, we control fewer variable. During Q2, we paid more for lower quality material that affected extraction yields, margins and our ability to remain in a normal purchasing rotation with some of our customers. The results demonstrate why expanding our cultivation footprint is so important. Revenue declined 16% to $7.3 million and adjusted EBITDA was negative $631,000. At the same time, gross profit increased 62% year-over-year to $2.4 million and gross margins nearly doubled to 33% from 17% last year. That margin improvement was driven in part by the growing contribution from higher-margin hydrocarbon products, which became the company's largest revenue category for the first time this quarter. As nonvertical extractors leave the market, Leef is capturing more market share, and I believe that this trend will continue. This progress gives us confidence in what lies ahead. In 2027, we expect to be running a full 180 acres, supplying our extraction platform with our own clean biomass capturing higher margins through HIMALAYA and being ready to pursue international and interstate opportunities when they become available. I'll now turn it over to Kevin to walk through the financial results in more detail.

Thanks, Micah, and good afternoon, everyone. From Q3 of last through Q1 of this year, we ran this business on our own input material from Salisbury Canyon Ranch or SCR for short, and gross margins climbed from around 20% to 50%. In Q2, we didn't have SCR material. Last year's harvest was used up, and this year's crop was still in the ground. As a result, we ran purchased biomass inputs instead and gross margin came in at 33%. That's not a bad quarter, but it puts a number on what vertical integration is worth to this business. Running and selling our own material puts margins closer to 50%. Net revenue was $7.3 million against $8.7 million in Q2 last year. Unit volumes were down about 20%, partially offset by a roughly 5% improvement in average selling price driven by product mix. Part of the volume decline is the California wholesale market, but part of it was a deliberate choice. With SCR material coming in Q3, we saw no reason to overbuy third-party biomass just to chase revenue at thin margins. So we bought only what made economic sense, took the volume hit in the quarter and put our working capital into inventory ahead of the harvest instead. Q2 volume was the trade-off for Q3 and Q4 margin. Most of that pullback came on the distillate side. And because of that, the composition of our revenue changed. For the first time, hydrocarbon products were our largest revenue category, and they carry a higher price point and margin than distillate. That's the mix improvement that you see in the pricing number, and it's why even without SCR material, gross profit was up $2.4 million, up from $1.5 million a year ago and up 62% on less revenue. Gross margin came in at 33% against 17% in the same quarter last year. The business is structurally better than it was a year ago. We do expect distillate volumes, along with the margin that comes from running our own biomass through that line to rebound in the second half of the third quarter and into Q4, just like it did last year. Adjusted EBITDA for the quarter was a negative $631,000. First half adjusted EBITDA was still a positive $1.7 million against a negative $2.1 million a year ago. We ended the quarter with $5 million of cash, up from $2.2 million at year-end and a working capital surplus of $8.7 million when we started the year in a deficit. This is mainly due to the private placement rounds that were closed during the first half, and this allowed us to really invest into our balance sheet, both through CapEx spend at the farm and into inventory as well. Leef's balance sheet has never been stronger. We have the cash to execute on our vision and the inventory to jump start the second half of 2026. Inventory grew to $7.1 million from $3.4 million at year-end with work in process, specifically biomass in the field and oil moving through the pipeline at $4.2 million of that. A lot of that cost is the harvest that has since completed in Q3. We own the farm, we have the balance sheet to carry the crop, and we don't have to sell anything into weakness. That inventory is Q3 and Q4 sitting on the balance sheet at our cost. SCR is now fully harvested, and we're already processing it into our first several hundred liters being produced in July and expected to sell here in August. None of that is in the Q2 numbers you just heard. It starts showing up in the second half of Q3, much like it did last year. On capital, we raised roughly $9 million during the first half and another $5.2 million closed in July for about $14.2 million for the year. That funds continued investment in the ranch and in inventory. We expected Q2 to be a softer quarter this year, and it was. However, it helps to show why the investment into the ranch and vertical integration is so important. This model works when we're running SCR material and everything is now in place for that. The harvest is complete, the material is in-house and the first liters are already produced and looking great. Thanks to the Mindset capital team, we have the capital to carry the crop and sell it on our terms. You'll start to see that on the back half of Q3 and more fully in Q4 and beyond. With that, I'll hand it back to Micah.

Thanks, Kevin. There are 4 things that excite me most about Leef's business coming over the next few years. First, operating the full 180 acres at Salisbury Canyon Ranch with a larger, more reliable biomass supply. This is coming soon. And to go off script here for a second, I'm on the farm now, and we're halfway through replanting the second part of this farm. And Jesse puts out this content. You guys have all seen it. He does a great job of showing how big it is and the scale of it. You can't really put it into a video to really get the full -- to truly appreciate what we're building here. So I'd recommend anyone that wants to come here, you guys should come see it. It's already one of the largest farms in North America, and it's only going to get bigger. And one of the most important things about this farm, we keep saying it, and I think it's going to be more and more important over the coming years is the fact that this place is truly clean. Medical-grade totally non-detect, clean material. It's very, very hard to come by in California. I know it's hard to come by in other markets as well. And this is going to matter. I'm going to talk more about this like export world that's coming our direction here very soon. And I think this is one of the biggest assets that the company has, and that's why it's in the first position, what I'm most excited about. To get back on script here. Second, adding the processing capacity to support that scale and improve our economics over time. Third, growing HIMALAYA and capturing more of our higher branded market products opportunity. This is another one, guys. I think HIMALAYA is a huge opportunity for us. We're definitely going to see a lot of growth next year for sure. And this is like a part of a longer-term strategy that will come later down the road, not something that we're necessarily going to dive into right away, but building a CPG portfolio to capture these higher margins is definitely something that I see in the future of the company. And fourth, this is the one that I'm -- the farm is most excitement in the short term. The long-term thing here for us guys is preparing Leef to serve interstate and international markets when those opportunities become available. So let me walk you through each one of these, starting with the Ranch. By this fall, our total internal and contracted cultivation footprint is expected to reach 122 acres. That's an 88% increase from last year. That puts us well on our way to operating the full 180-acre permit at Salisbury Canyon Ranch in 2027. Leef's 180-acre land use permit for cannabis is one of the largest in North America, and the capital required to bring the full footprint into production has already been invested. So this isn't like a future CapEx need for us. The way that Santa Barbara works, we have to build out the whole farm in order to get the sign off. So all of that money, the infrastructure, the fencing, the irrigation, everything has been done. So we are ready to go for next year. Supporting that expansion requires more processing and storage capacity. Following the quarter, we raised an additional $5.2 million to purchase a facility that can dry, cure, freeze and store biomass before it moves to Leef labs for extraction. You guys have heard us talk about the cost of pound and the cost per gram of where we're currently at today. This facility is going to allow for us to find efficiencies beyond that and to further drive our cost down over the years to come. And I think between the farm this processing facility and our extraction facility, every year, we're going to get better. And you're going to see these numbers come down across the board from transportation to all kinds of different efficiencies that we've really yet to unlock. This facility is the final major piece of our platform. It can support the full 180 acres and may create additional revenue streams by offering services for other cultivators and over time, is expected to double the amount of biomass for each harvest available to lease. To say it a little bit differently, this facility is going to become a procurement tool for us. There's other -- it's a huge unmet need because the way that cannabis was originally set up in California, the regulators didn't have ag in mind. They had small-scale cannabis. And now that we are getting away from that, we are moving into more of an ag type -- our style is more ag. We're able to go to other cultivators that have these large fields that don't have processing facilities and get really, really discounted rates on material beyond what we currently grow for ourselves. HIMALAYA gives us an established brand for our clean concentrates and allows us to capture higher CPG margins. It contributed approximately $1 million in revenue during the partial quarter following the acquisition. Based on this trajectory, we expect HIMALAYA to deliver strong growth in 2027 and begin making a meaningful contribution to cash flow. We see HIMALAYA as the first step in a broader branded product strategy and will remain disciplined as we evaluate additional brands that could benefit from our supply chain, manufacturing capabilities and cost structure. I think over the next couple of years, guys, 2, 3, 5 years, there's going to be all kinds of opportunities for really good brands that will not be able to survive unless they are attached to something like what Leef is building right now, and it's going to open the doors to opportunities that aren't otherwise available to us today. So just hold tight because I do think that, that's coming. Executing that strategy requires investing all of this stuff, executing the strategy requires investing into the right team. To that end, we recently brought on Chris Crouch as the company's Chief Revenue Officer. Chris brings more than a decade of cannabis experience across retail, CPG, operations and revenue leadership. Most recently, he served as the Chief Operating Officer of Turn, which is a leading U.S. vape company and previously held senior positions with Urbn Leaf, Volcom, Pac Sun, and Quiksilver. We're excited to have Chris join our team and the opportunity to invest in the key seats that are going to help us grow this business. We also engaged Hirsh Jain of Ananda Strategy as a strategic advisor. Hirsh is helping Leef navigate the evolving policy and regulatory environment, supporting engagement with policymakers and evaluating the opportunities related to federal rescheduling interstate commerce and international markets. That brings me to the opportunity beyond California. And this one, guys, honestly, this is the thing out of everything that's going on in the industry and within our company. This is the one that I'm most excited about. Today, Leef manufactures and sells within California, where oversupply keeps wholesale prices well below many other markets. Everybody knows California is the toughest market to operate in. It's the largest, it's the toughest, it's the most innovative, but pricing is the lowest across the world compared to other markets. If interstate commerce opens up, we believe that we can leverage our manufacturing expertise, low-cost production platform to supply higher-priced markets across the country. Following the Trump administration's rescheduling order in late April, we received inbound -- we have been receiving inbound interest from several of the industry's leading multistate operators. Many of these companies are already preparing for a future in which cannabis can move across state lines, even though the exact timing of interstate commerce remains uncertain. These discussions have reinforced our belief that Leef has built a differentiated platform with industry-leading cultivation, extraction and manufacturing capabilities. Operators recognize Leef's cost advantage and extraction expertise can help improve their margins while allowing them to focus on building brands and serving customers. The reason why prices across all these other markets, guys, why they're so expensive is because they're using indoor material and these other farming practices to create the same types of products that Leefs are, and there is no way that they're going to be able to get it as low as we can, not even where we are today, which I think we're going to get significantly under over the next coming years. We view this interest as meaningful validation of the strategy that has guided our investments and operational decisions over the past several years. As the industry evolves beyond today's state-by-state markets, we believe Leef is well positioned to become a trusted supply partner to leading operators across the country. Ultimately, we believe it's not a question of if, but when Leef will be able to supply these other markets where pricing for many products remain substantially higher than what we see in California today. We are seeing similarly strong interest from leading international operators. Our team is identifying the best market for Leef and the specific GMP standards required to serve them. We believe the global cannabis industry is moving towards more medical-focused standards and tighter quality controls. Salisbury Canyon Ranch produces clean biomass and concentrates manufactured from it have passed California's elevated CAT4 pesticide screen. These are the hardest ones in the world to get by. We are building on that foundation to meet the GMP requirements of our target markets. We also filed DEA registration applications and engaged Shane Pennington at Blank Rome to guide us through the process. Our goal is to have the registrations, operating standards, customer relationships and production capacity in place before these markets open up. The economics explain why those opportunities matter. For illustrative purposes, we estimate that we can produce distillate under $0.50 a gram and sell it in California for around $1 a gram. Prices in other markets can be several times higher. Distillate may sell for approximately $3.50 per gram in New York, $8 in New Jersey and as much as $12 in Ohio. We see similarly high prices in certain international markets. We expect those prices to decline as markets opens up, but we don't need to capture the full pricing difference for the opportunity to be significant. At our current cost structure, selling distillate for $2 a gram would generate a gross margin of approximately 75% -- that is the advantage of producing clean concentrates at costs many local operators will not be able to match. Okay. So let me close by putting this quarter in perspective. Four years ago, we recognized that relying on third-party biomass was not a durable model. So we built our own cultivation platform. Q1 demonstrated the upside of that decision and Q2 has reminded us why it is necessary. Leef is a stronger company today than it was 90 days ago. We have a larger cultivation footprint, a completed harvest, better product quality and established consumer brand, the balance sheet to carry our inventory and a dedicated processing facility. In 2027, we expect to be operating the full 180 acres and capturing higher margins through HIMALAYA. Over time, we expect the processing facility to allow for us to retain more material for each harvest and improve our economics. Together, these investments are building one of the industry's lowest cost platforms for clean cannabis extracts and positioning Leef to serve interstate and international markets when those opportunities become available. I want to thank our employees, customers, partners and shareholders for your continued support. With that, I'm going to turn it back over to Jesse, so we can then open up the lines for questions.

Thanks, Micah. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Penny Stowell of [ StockSpeak ].

I have a couple of questions for you guys, but let me just start with this. You've met with many of the larger U.S. multistate operators. What are you hearing from them? And where could we fit into their supply chains if interstate commerce opens?

Yes. Maybe I'll kick this off and then Jesse, maybe I'll have you kind of round out whatever I missed. But yes, we have. We've been speaking to a handful, if not more, of these larger companies, met with a handful of them and Benzinga and then having a lot of follow-up conversations since then. I think the overarching sentiment with most of them is that everyone's pretty confident that this is going to happen sooner than later. And when I say that, like it's definitely no one knows 6 months to 2 years is kind of the time frame in which everyone's I guess, on. I think -- I mean, we're a concentrate provider, right? Like that's our main business. We have had -- some of the companies ask us if we could also become a flower provider as well, which is interesting. It's not something we're currently doing, but it's not something we couldn't do later down the road. The main thing that I think everyone is looking at is like kind of on a global level, take it -- I'm not going to name any names, but just some of the bigger companies, they look at it and they say, our cost to produce distillate on average across all of these different markets and countries that we're in are, call it, $3.50. We're sub-$0.50 currently where we're sitting today. I think that they realize that like it makes more sense for us to basically shut off a lot of this infrastructure that we have because there's no way that they're going to be able to compete with it, or be able to survive as the market starts to like open up and these international -- like the -- what's the word I'm looking for, levels start to set on where pricing is going to fit. I think that it's just obvious to all these operators that like they're definitely going to come down, and it would make more sense for us to purchase it from someone who has the scale and also has the ability to hit the quality standards that everyone seems to agree is coming. So yes, I mean, I think that the main thing we've been talking about is primarily around concentrates and how can we fit into their supply chains. There's a bit of diligence going on just on like where are we at with our DEA licenses and GMP and some of the certification stuff there. Maybe Jesse, I'll pass it to you. Why don't you maybe just give kind of a brief update on where we're at with all that stuff.

Yes. So on the interstate side, Penny, I'd say what we're learning, which is not surprising, this is an opportunity for everybody to do what they do best. And so Leef does a difficult part of the supply chain. Growing is difficult, extracting is difficult. We're doing both of those things. And what we're hearing from some of the larger MSOs is that they never had to grow a gram of flower, extract a gram of concentrates, they'd be really happy people because they could then do what they do what they do best, which is build really powerful brands and serve customers through the retail distribution platforms. And so I think it's an opportunity for value unlock in the industry, both in terms of the economics Micah talked about, where they can drop their cost we can have our margins go up, but we can also really do what we do best, which I think is a huge unlock for the industry. So I'd say, yes, like I said, I'd echo and say just there's been really unanimously positive feedback about people being interested in this opportunity when those -- when it becomes available. So that's the interstate side. On the export side, Penny, we've been focusing on identifying target markets. And so it's a big world out there. And some markets like Germany might be more of a flower market, whereas you have other countries which are more of a concentrate market. So we're looking to lean into those larger concentrate markets as step 1. And then step 2 is we need to understand what's required to sell there. So it's not just as simple as having that DEA license, your target markets will have their own requirements, and that starts with different GMP standards. So a lot of people talk about EU GMP, but if you're in other countries around the world, they'll have their own specific GMP standards. So it's really a 2-step process in the international markets, identify the target markets where your products can do best. And then number two is figure out what the GMP standards are. Maybe there's number three, which would be upgrading your facilities to meet the GMP standards of those target markets. So all of those are in process. On the interstate side, we've had a bunch of conversations digging deeper with a bunch of operators. And on the international side, again, about identifying target markets, finding the right GMP certifications. We're engaging a GMP consultant and are starting to begin some of those facility upgrades here shortly. So we can hopefully serve those target markets internationally in 2027.