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Mercanto Holdings (TSXV: MUSH) posted a quarterly net loss on Thursday as the Canadian cannabis producer grapples with market headwinds in its core Quebec region as it hones in on a national expansion strategy.

The Montreal-based company, which was known as The Good Shroom Co. until January, posted a net loss of C$109,215 for its fiscal second quarter ending Jan. 31, versus a net profit of C$56,017 in the same period a year earlier.

Revenue fell to C$1 million, down from C$1.13 million year-over-year, with net revenue after excise taxes reaching C$840,000 versus C$930,000 in the previous year’s quarter.

CEO Eric Ronsse attributed the decline to “ongoing industry challenges and temporary softness” in Quebec, which has historically accounted for more than 93% of the company’s revenue.

Still, management “remain(s) confident in our long-term strategy,” Ronsse said in the statement.

The company cited a product rationalization process by Quebec’s provincial cannabis board as having “temporarily impacted sales volumes and contributed to the decline seen” in the second quarter. Several high-performing SKUs were removed as part of this process, bringing “a measurable hit to revenue in past quarters,” according to the company.

Mercanto kept a debt-free balance sheet with working capital of C$417,814, down from C$563,617 as of July 31, 2024. The company posted negative EBITDA of C$96,038 for the quarter.

The second-quarter loss follows a smaller net loss of C$55,000 in the first fiscal quarter of 2025, which ended Dec. 23 last year, Green Market Report previously reported. For the 2024 fiscal year, which ended July 31, the company had reported a profit of C$40,603.

Mercanto is pursuing a multipronged growth strategy to reduce its dependence on Quebec and expand nationally. Management plans to launch four new products in May, with three expected to “positively impact the company’s bottom line and re-energize sales in Quebec.”

The company already launched THC pouch brand “Deckies” in Alberta and Ontario, with plans to enter New Brunswick later this quarter and Saskatchewan in the fiscal fourth quarter. Early consumer reception has been positive, it said, which cited “unsolicited praise across online communities such as Reddit.”

Mercanto also said it’s positioning itself to enter Quebec’s vape category when in the fall. The company noted that with only an estimated 15 vape cartridges and two compatible batteries approved for sale across 104 authorized stores, the category is “a significant opportunity for suppliers.”

“If secured, this will provide significant recurring value to Mercanto and position us as a leader in a new and lucrative product category in Quebec,” Ronsse added.

The company’s gross margins were temporarily impacted by one-time reworking costs related to products returned from Alberta and Quebec. Rather than allowing the units to accumulate in inventory, Mercanto chose to rework and resell them in alternate markets, albeit at reduced margins.

Ronsse expressed optimism about the industry’s future despite current challenges.

“The Canadian cannabis sector is undergoing a reset, and while many companies are struggling – with CCAA filings increasingly common – we believe the bottom is near,” he said.

The CEO noted that the company has already begun to benefit from industry consolidation, securing a “prized listing” with its Velada CBD capsules in Quebec after a competitor in the capsule category ceased operations.

While Mercanto doesn’t expect a sizable rebound in the fiscal third quarter, it said it’s keeping focus on innovation, cash flow management and operational discipline. The company reduced trade payables during the quarter and brought certain outsourced services in-house to reduce professional fees.

In January, the company also announced a new “fixed up to 20%” stock option plan, replacing an earlier version that was “rolling up to 10%.” The plan is designed as “an improved way to compensate company officers and other shareholders as Mercanto continues to grow,” with eligible recipients potentially receiving stock options over the next decade. The company will issue up to 10.1 million options under the plan.