Emblem Corp (CVE:EMC)(OTCMKTS:EEMBF)(FRA:E0M) CEO Gordon Fox makes the case that Canadian medical marijuana and recreational cannabis will always be a notch above U.S. grown weed for the simple reason that we have a much higher bar when it comes to national regulatory standards. His depth of knowledge in the space, and conservative approach to growth make this a “must-hear” podcast for anyone in the cannabis sector.

Listen to the podcast interview with Gordon Fox:

Transcript:

James West: Gord, thanks for joining us today.

Gordon Fox: My pleasure.

James West: Gord, let’s talk a bit about Emblem and what is it about Emblem that differentiates it for investors from the rest of the ACMPR growers.

Gordon Fox: Okay. So our business plan is informed by our perception of the challenges that the ACMPR growers are facing. We have three verticals to address those issues: first, we have a production company, second, we have a health care company, and the third is, we have a pharmaceutical development division.

So on the production side, we’re a “closed box” producer; the…you know, what’s interesting is, I’ve gone around the street it’s often not fully understood by the investment community in Canada that we have a regime for the production of cannabis which is quite different from the regime that our American brothers and sisters are working under. The standard that’s been set by Health Canada for the minimum quality of the product that can leave our production facility in Canada is much higher than it is in the States. Our product has to be truly pharmaceutical grade. In other words, it has to be free of all microbials, no mold, no mildew, no residue from human contact. But often missed is the fact that it also has to be free of allergens and any other elements that could potentially present a health hazard.

So that in turn materially constrains the herbicides, the pesticides, the grow media and the fertilizer that we can use. We’re actually flying through a very narrow point in the hourglass from a regulatory perspective in order to get our product to the street.

That tells us a couple of things: it says from a business plan perspective that, from the standpoint of the people we hire as growers, they have to have strong –scientific backgrounds. Second is, we have to have world standard SOPs, and the third is, senior management has to be committed to deploying capital to create the environments that are necessary for our growers to reach these exacting standards.

So we’re building a state of the art grow facility in our facility in Paris, that will allow us to reach the highest level of production in terms of quality, and our intention is to perfect our techniques and our command of that architecture and then expand it out at scale when the recreational regime arrives. Our business plan is to stay in closed box when recreational arrives, and to be aiming for – now, let’s go back – I think that our perception is in the dried flower end of the recreational market, there will be a table wine market and a fine wine market, and we’re going to be aiming for the champagne end of the market.

We’ll have higher production costs than others, but at the same time, we believe that at that end of the market, the margins are going to be better. It’ll be a somewhat smaller market than the table wine market, but the margins will be better, there’ll be less competition for shelf space, and we’ll get a better return on our investment aiming for that part of the market.

James West: Great. Let me ask you, just for clarity’s sake, when you say ‘closed box’ environment, that’s in opposition to a hybrid greenhouse or greenhouse scenario, correct?

Gordon Fox: That’s correct. So let me just – it’s worthwhile for your listeners to maybe understand what all this means. When we’re building a closed box, what are we trying to do? What we’re trying to do is actually recreate the environment from the hillsides of Afghanistan from a bygone era, where these genetics actually arose. So consider the following parameters that we’re working with: typical 8-week cycle for the production of cannabis.

A typical plant will receive somewhere between one and two litres per plant, per day, usually more at the high end. There’s a bit of runoff, but basically that all goes into the plant, and the plants have a 95 percent saturation rate, which means that 95 percent of that water ends up into the air in the room after you have fed the plant. There’s a humidity grid that has to be followed during the 8-week cycle. The humidity can be allowed to be up almost to 70 percent in the early weeks, but by the time the canopy reaches its full breadth in the last two weeks, the humidity has to drop down to 40 percent.

There’s a temperature grid that has to be available in that room; it varies during the day. The temperature has to go up during the day and down during the evening for the part of the cycle that replicates those. It can’t exceed 27 degrees during any part of the cycle, or be less than 20 degrees. And it needs colossal amounts of air movement.

In order to be able to produce that regime, we need massive HVAC capacity in every room. So age chillers…in fact, when I was talking to my colleague here, Danny, about these chillers, they’re so strenuous in their capability, in other words to take the moisture out of the air, that we actually have to cool the air to a point where it’s too cold to put back in the room. So after you’ve cooled it and dehumidified it, you have to heat it up again before you can put it back in the room. So you not only need chillers, you need heaters as well.

And so this – there’s a fair amount of technical elements to the building envelope science, as well. The level of insulation or the amount of moisture in the room, the level of insulation that’s required to make sure that water doesn’t cool in behind the walls and become a growing medium for mold and mildew, is quite significant.

With all these things, the overall conclusion is, if you’re going to do closed box and you’re going to do it right, there’s no cheap way to be in this business. And as we go to recreational and have to do it at enormous scale, I guess my observation is that the Canadian cannabis business, certainly in closed box, is not a business for the faint of heart. There’ll be significant capital has to be invested. So that’s our read on where we are today in terms of our production business, and where we’re going and what our strategy is going to be, and how we’re going to deploy our capital to prepare for the dried flower part of the recreational business.

You did mention, and it’s interesting you brought it up, because I’ve been on the road now in road shows for at least four months, and it’s a very common question: what’s your strategy for derivatives when recreational arrives. And there seems to be a general impression that somehow the Canadian recreational regime is going to follow the model in the US, let’s use Colorado, where it’s variously estimated somewhere between 40 and 50 percent of the cannabis products sold in Colorado are actually derivatives, some edible or some other extractions.

James West: Right.

Gordon Fox: And if that were to come to pass in the Canadian market, it would be a tremendous advantage. First of all, the profit margins are greater in extracted product than they are in dried product, and secondly, it takes a bit of pressure off the licensed producers to produce the quality of product that’s mandated by Health Canada at the moment, because if you can’t meet that standard, you can always extract it and then turn it into a burger.

James West: Sure.

Gordon Fox: So this tells you that it would be a tremendous boon to the Canadian recreational marketplace if we got to 40 or 50 percent of the market being derivatives.

I think the bad news is that from my perspective, there’s very limited prospect of getting that size of derivative market in the year to go in Canada, similar to what they have in Colorado. I think that we all get the message now about the Canadian government’s approach to consumer protection, customer protection and product protection as it relates to cannabis; they didn’t develop it just for cannabis, it’s the same thorough-going approach they take to all consumer protection in Canada. But I think that there’s going to be a particular fixation on making sure that the Canadian public is thoroughly protected when it comes to cannabinoids.

So I’m not saying there will never be a vibrant derivative market on the recreational side in Canada, but certainly in the early going, getting product approved is going to be a labrynthian regulatory task, and I expect that in the early going in, let’s say, in the Canadian regime, we’re going to be on a “make or break” basis with dried flower and basic oil.

James West: Okay, yeah. Interesting. I want to just focus a bit back on where Emblem is today.

Gordon Fox: We do produce a very high quality product, and we’ve been licensed to produce for more than a year, so we’ve had significant sales in the wholesale market so far.

James West: Okay, great. So then, what is the size of the facility you’re currently growing in?

Gordon Fox: We have, well, the total facility, including all the support space, around 23,000 square feet. We have right now about 3,500 square feet plus or minus that we’re growing in; that’s being expanded now to a little over 10,000 square feet by the end of May. Today we’re producing at the rate of about 50 kilos a month; by June, we’ll be producing at an annualized rate of around 2,000 kilos a year.

James West: Okay. That’s interesting. So is that, then your first sort of production profile stop, 2,000 kilograms per year, or are you going to continue expanding sort of incrementally as you go?

Gordon Fox: Well, that’s a lot of production for medical. Absent a clear path forward to recreational, we wouldn’t expand. That being said, I think we have that clear path, and we have a plan for expansion to go to and beyond 20,000 kilos. We’ll be husbanding our cash to make sure that the regime is in fact going to be in place on a timely basis, and that we’ll be finishing and commissioning our expansion to meet the onset of recreational.

At the moment, our read is based on the passport support and other feedback that we’re getting from government relations guys, is that you’re probably looking at the end of 2018 and beginning of 2019 for recreational sales.

James West: Okay. So that’s when you’re feeling that it’s actually going to be available for consumption by consumers?

Gordon Fox: Correct.

Editors Note: This is part one of the interview. We will publish part 2 next week.