MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF) CEO Neil Closner makes no bones about the fact that his company’s marijuana is the highest quality available in Canada. With an impressive depth of knowledge in the space, and as the country’s only “significantly profitable” ACMPR grower, Neil illuminates the reasons for that positioning, and the company’s plans to capture recreational market share.

Transcript:

James West: Neil, thanks for joining us today.

Neil Closner: Thank you very much. Great to be here.

James West: Neil, maybe we could start with an overview: what is the value proposition for investors in MedReleaf?

Neil Closner: The value proposition is that we happen to be a producer of the highest quality cannabis, we believe, in Canada. When I say ‘we believe’ that’s validated by the fact that patients, by and large, are purchasing products from us that are at a higher price than the average market price, which seems to be a validation point on the quality of our products.

We’re the lowest cost producer on the market, and we’re the only substantially profitable licensed producer in Canada.

James West: Hmm. Okay, so when you say the highest quality, and you’re not obviously targeting a low price, is that your primary competitive differentiator then, is that the quality of your product is much higher than everyone else’s?

Neil Closner: That’s certainly one of them. I mean, it’s a number of the factors that go in to producing that high quality product that we believe provide us with a sustainable competitive edge over the others.

James West: How long has MedReleaf been producing marijuana?

Neil Closner: We received our first license in February of 2014, and we’ve been shipping product since August of that year.

James West: Okay. And how many –

Neil Closner: Just coming up on three years.

James West: Sure. And how many clients or patients do you have, presently?

Neil Closner: So patient numbers is something that we don’t disclose; we don’t really view it as being a relevant metric, if you will. All patients are not created equal, and many, many patients don’t order very much or order at all. So we view volume of products shipped, dollars generated, revenue dollars generated and certainly profitability as being the drivers or the metrics that we follow to gauge how well our business is doing.

James West: Sure, okay. And so, what was your last reporting period, what was the volume of cannabis products shipped, and what was your sort of gross margin on all of that?

Neil Closner: So I don’t have those numbers right in front of me. The last quarter we reported was the quarter that ended December; we’ll be releasing our fourth quarter of our fiscal year ending March in a couple of weeks. But I think we shipped, and don’t quote me on this because I don’t have it in front of me, but I think we shipped about 1,000 kg?

James West: Okay. So is that sort of consistent of what you will ship annually, is about 4,000 kilograms currently?

Neil Closner: Well, it’s picking up every quarter, so we’re certainly on a growth trajectory there. So we expect that number to steadily increase certainly, over time.

James West: I see. So is your growth trajectory predicated primarily on new patients onboarding, or on more product consumption per patient?

Neil Closner: I think it’s largely the former. I mean, the user base that we service, which are patients, we’re not in the business of encouraging them to use more than they need, or, you know, upselling them or anything like that; this is a medical business. Patients come to us with a prescription from a physician, and they tend to order what the physician recommends that they use. So this is not like a traditional e-commerce business where you have an opportunity to upsell people once they’ve put some stuff in their shopping cart and you try to push additional products on them; that’s really not the business that we’re in.

James West: Well, that’s a relief. Okay, so what is it about your approach to producing cannabis that gives your product the highest quality?

Neil Closner: Well I think there’s a few factors that go into that. The first one would be, and it’s really the pivotal question that any producer getting into the business needs to consider and answer for themselves, which is, do you want to grow indoors or in a greenhouse? And I think once you accept which, and it by and large is a widely accepted understanding, that indoor-grown cannabis is considered to be of higher quality – you look at almost any mature market in the world and indoor cannabis attracts a higher retail price than does greenhouse product, and that’s because of the quality considerations – so indoor, right away, starts you off at a somewhat higher plateau of quality.

Then you layer on top of that the rigour and the science that we believe we’ve brought to the business, which is somewhat unique, and we believe very unique. My background comes from a health care setting; I used to work at a major hospital here in Toronto, so we’ve come at this industry with a lens of bringing rigour and analytics, and actually focusing on production numbers and data in order to drive our business. And what that means for us is that we analyze all the inputs that go into the cultivation of every one of our harvests, and we cross-reference and analyze the results of those yields and of the harvest back with all the data that went into each of the harvests, or went into each of the grow periods, in an effort to best understand if we tweak this variable, what does it mean for yields? What does it mean for product consistency, what does it mean for bioburden when we send the product to the lab?

Because we’re growing indoors and because we’ve established our work flow in such a way that we’re essentially harvesting one crop almost every single week of the year, it provides us with an opportunity to learn almost every week of the year, at least something about this grow process, which is – cannabis as a commercial product has never really been grown at an industrial level and an industrial scale. And so the level of agricultural rigour that exists in most other fruit and vegetable industries does not exist here yet. So we wanted to bring that to this business, and the fact that we can learn every single week from every new harvest that we do, you compare that to a greenhouse grower that does two or three harvests a year, and the data that we can accumulate in one year versus what they can accumulate in one year is like 25x.

James West: Right.

Neil Closner: And all of that helps to drive substantial, incremental improvements on every harvest that we undertake.

James West: Okay. That’s interesting. I’m looking at your Power Point presentation and it makes very clear that you’re looking to capitalize on the growth opportunity inherent in the advent of recreational cannabis, and I’m just curious as to how much do you think that recreational cannabis users are going to be attracted to the qualitative differential relative to medical users, in the recreational space?

Neil Closner: Well so that’s a very good question, and actually, we answer it by saying quality in the cannabis business actually has two distinctly different categories, if you will. There’s the qualitative element of quality, and there’s the quantitative. And so quantitative is much more about the lab results that you get back, the consistency of the cannabinoids and the terpenes, the lab results in terms of bioburden and mold and other things; those are the quantitative elements or measurements of quality.

The qualitative, or rather the more subjective, and really I should have been referring to objective and subjective is what I meant, the subjective elements of quality are the taste, the smell, the colour, the if you will ‘bag appeal’ when you open it up: those things matter to recreational users. In fact, they matter even to some medical users, but they will matter, we believe, much more so to the recreational user. And we’ve consistently delivered what we believe to be amongst the highest quality cannabis produced in the country. We’ve won a number of awards to validate that; as I said, patients pay more for our products than they do for almost any of the other licensed producers’ products.

Al of that is a validation of what people believe to be our higher quality products. And so we believe, in a recreational market, that there will always be – and you know, you hear a lot of talk about this becoming a commoditized product – we believe even in a commoditized environment, there will always be a segment of the market that appreciates the premium product within that space.

James West: Sure.

Neil Closner: And that’s an area where we intend to remain and stay.

James West: Okay. You currently growing in 55,000 square feet; you have a 210,000 square foot building that is in the process of going live, I’m imagining?

Neil Closner: It actually is live already. So that building was licensed in April, at the end of April; plants have been in there now for over a month, growing. We’re building it out in phases, so there’s about, of the production that we get out of our Markham facility today, about an equal 40 percent of that is coming out of our Bradford building shortly with our first couple of harvests that will come in the next few weeks.

James West: Right.

Neil Closner: And then we’re continuing to incrementally build more rooms in that building now.

James West: Okay. So then, is that the extent of your buildout plans currently, and will that be sufficient to address the recreational market opportunity? And thirdly, I realize I’m asking you a three-pronged question here, will you still realize a production rate of 300 grams per square foot in that large facility?

Neil Closner: Yeah. So the Bradford building will require about another $40 million to $50 million to finish building out. That’s why we’ve undertaken our initial public offering a couple of weeks ago. We’ve now secured those funds; they’re now being deployed over the next 12 months, the Bradford building will be fully built out and we will be adding rooms incrementally during that period to continuously increase our supply of product.

That building, coupled with our Markham facility, which will obviously remain in production, together, will produce about 35 metric tonnes of products a year, so that’s 35,000 kilograms. It sounds like a lot; it is a lot. You pick whatever retail number or revenue number you want to put on that product per gram, and you still have about a $200 million, $300 million or more hundred million dollar business coming out of those two buildings.

To answer I think your second question, no, those two buildings will not be enough, long-term, for the recreational market, but we don’t expect the recreational market to show up on Day One and automatically be at its maximum potential, right? It’ll take some time to grow into it. So that will give us some additional time to identify and continue to expand additional locations for us, which is obviously something that we’re already underway with, because we recognize that there will be substantial additional demand that we will need to satisfy.

James West: Sure. So in your opinion, do you think that the rate at which new ACMPR licenses are being granted, which if we took June, that would be three per month – you know, the average for the year might be two per month – but do you think that there’s a risk of oversupply occurring at some point in the near future that will have a detrimental or a negative effect on the price that growers are able to obtain from customers?

Neil Closner: It’s hard to say. I don’t – there will certainly be an acceleration, seemingly, in terms of the number of new licensed producers that will be added to the list. Without knowing who they are and at what stage of development each of them are at, it’s difficult to say how quickly they’re going to have real quantity on the market; our suspicion is that it’s going to take anyone licensed today is likely still about two years away from being able to produce at scale, products that meet all the standards.

So we think that buys the existing producers some degree of time. I think if you look at the recreational market that is to come in, I guess, exactly twelve months from now, or twelve and a half months, whoever those retailers are going to be within those spaces in each of the provinces are going to have to be putting supply contracts in place over the next six months or so, nine months at the most, so that they know that whenever they open their doors or turn on the lights or whatever they’re going to do, that they have product on the shelf.

So none of these new entrants are going to have the capacity to meet that timeline.

James West: Right, and especially not –

Neil Closner: So I’m not sure what that will mean. It’s hard to say what that will mean from a pricing standpoint right now; it’s, I could make the argument that demand far outstrips the supply right now, and that pricing should, if all actors in the market acted rationally, should actually maintain itself quite well going into the next year, year and a half with this substantial new demand being looked upon and yet not a lot of supply coming onstream.

James West: Okay. So how do you attract customers now? How do they find out about MedReleaf, and how will you attract them in the future in the face of a policy that seems to be gravitating towards no advertising?

Neil Closner: So I mean, that depends on, how do we attract patients now, which are again, they’re patients, not customers? And then you look to the rec market, so they’re two different answers. From a patient standpoint, we’ve been very fortunate in that our reputation has essentially preceded us. Physicians have come to understand the quality that MedReleaf has brought to the industry. the fact that we’re the only ISO certified cannabis producer in North America, and we will very shortly be one of the few GMP-certified producers, the fact that we’ve never had to issue a recall…that our company is largely run by people from the health care sector, and we’ve tried to really set the bar for quality control and for scientific rigour. I mean, we probably have the largest research and development effort in the cannabis space; certainly in Canada, if not more broadly. Twelve full-time people, including PhD or Masters-level scientists.

All of those things have become understood by a great many physicians in Canada, and when the time comes for them to, you know, if a patient were to ask them for a recommendation, many of them are suggesting MedReleaf. And that’s happened for us for the reasons I just described, without us having to spend considerable dollars to convince them of that. So we’ve been fortunate in that regard.

When you look to the recreational market, though, obviously things will be different. A lot of it will come down to retailing and where it’s going to be sold, and what the taxes are going to look like. There’s just so many variables there that are yet unresolved and unanswered, that it’s difficult to say where we will be able to market, how we will be able to advertise if at all, how we will be able to brand…so it’s hard to even answer that today.

What I can say is, we’re following it very closely, obviously. We’re preparing as best as we can in all areas so that we are ready, and that we’re essentially agnostic as to what may or may not happen. When announcements are made, we will be able to react as quickly as anybody else, if not more so.

James West: Okay, great, Neil. Well, that’s a brilliant introduction to my audience, and I thank you very much for your time. We’ll come back to you in a couple of quarters and see how you’re doing. Thanks again for your time today.

Neil Closner: Terrific. Thank you very much.