Rena Sherbill: Today we are happy to present our interview with Chuck Smith, which was conducted by our co-host, Rudy Hernandez. Chuck Smith is the President and CEO for Dixie Brands (OTCPK:DXBRF), the parent company of the Dixie and Synergy brands as well as Therabis and Aceso Wellness, two of the leading hemp supplement brands. Chuck has over 25 years of experience in a variety of industries including real estate, retail, sales and marketing.
We were very happy to get a chance to sit down with Chuck on day two of the CWCBExpo in LA last month, where he gave a talk titled, ‘A Giant Leap Toward Normalization.’
On this episode, to give you a small sampling of what Rudy and Chuck discuss, we cover why Dixie Brands went public, via a RTA, its CBD line, its joint venture with Khiron (OTCQB:KHRNF), its plans for South America, as well as Chuck’s views on the Safe Banking Act, which had passed the house a day before this interview took place.
Also some cannabis news to pay attention to this week, the final earnings season of what’s been a — to say the least — rough 2019 is upon us, which means investors will be paying attention to what companies are reporting, and how the vaping crisis may have affected them. Companies that don’t show a clear path to profitability, that don’t go into great detail about their access to capital, that don’t offer concrete plans for spending, they will likely be met with frustration from investors. The negative reaction to MedMen’s (OTCQB:MMNFF) report last week is clear evidence of that. I would say the same thing about the mostly positive reaction to Aphria’s (OTC:APHA) recent revenue beat and very in-depth conference call. The positive reaction to that is similarly evidence of how investors are reacting to this kind of company news.
There are also a few pending MSO deals, multi-state operator deals in the U.S. Some of them are clearly in doubt, MedMen and PharmaCan ended their attempt at merging. Cresco Labs (OTCQX:CRLBF) announced last month that it’s renegotiating its potential merger with Origin House (OTCQX:ORHOF). And last week Curaleaf (OTCPK:CURLF), confirmed its intent to acquire Cura Partners, but has also restructured the deal. Investors didn’t react well to this news as Cureleaf’s stock cratered. All-in-all though busy times, lots to pay attention to, for cannabis investors.
Rudy Hernandez: Hi, Chuck. Welcome to The Cannabis Investing Podcast. Let’s get right into it. So how did you get into this space?
Chuck Smith: Well, Rudy, thanks a lot. I‘m actually really happy to be here with you today. Well, I got in the space quite a long time ago, been doing — been in the cannabis industry for almost 10 years. It started out with a business partner of mine, as really just a passive investment in Colorado. Actually, for truth be told I could actually only invest my sweat equity and intellectual capital, if you will, because it was not regulated in that state to allow an out of state investor. But I helped my partner start to build what is now Dixie. It’s exciting to go from thinking about being just a passive investor or passive participant in something to then see what the power of the plant, and the power of what we were doing really changing people’s lives, and then I‘ve been in it, with it since then. Sure.
RH: Sure, love it. Okay, so as a leader in the space, what are you all emphasizing right now, in terms of products, in terms of maybe a direction or a vision? What can you say on that?
CS: We‘ve always focused on developing high quality branded products in our portfolio. Now the brand, originally, being a Colorado-centric company, I would call us a branded house, meaning everything was under the brand of Dixie. And so for us, when a customer walked into or a patient walked into a dispensary, it was all about oh, I see the Dixie logo? I trust what’s in that package. As we‘ve evolved and the consumer has evolved now, and become much more expansive, both in profile and preferences, we‘re now trying to move into a house of brands, where everything doesn’t necessarily have to be branded, Dixie. It’s more about what are we serving? What need are we serving for that consumer, that patient? And then we target those products to that — building a portfolio of those things.
RH: Yeah, got you. Okay, cool. So let’s switch gears here a little bit. In terms of going public, you went the RTO route, right. Talk to us a little bit about that, and why you felt like that was the best move for the company. I‘m just kind of curious because, we‘re — a lot of investors listen to this podcast. So they kind of are going to want to get some insight on that from you, if you can share any thoughts that will be great.
CS: Well, you know, I guess answering that question depends on the day right now, right. The reality is that in seriousness, we needed to access the capital markets. The U.S. capital markets weren’t really open to us. Certainly traditional banking wasn’t open to us, being a U.S.-based cannabis company. And even though Dixie Brand’s a public company, we actually don’t touch the plant. We provide intellectual property marketing and other services to people that are licensed within a state to actually work with cannabis. We‘re still considered a cannabis company. So again, traditional financial access was sort of offside to us. We had to access the capital markets in Canada.
I think the timing is everything. We probably didn’t — we probably picked the worst day ever to go public because the day we went public, the very next day, the Aphria report came out. The whole market started to sell off and the market’s under pressure right now. We all know it. I think for investors, I would just say, you know, look at the fundamentals, look at the management team. Understand this is a long game. This is not a short — this should not be viewed as a short term investment because this is a very long term industry and we‘re in the first inning.
RH: Absolutely, sure, sure. Okay. So, right now the buzz phrase, CBD. A lot of folks are trying to get into it. And I know your company is working on some products. What are some of the products that you feel like are very interesting that you are coming out with? I know you touched on veterinary products like dogs, be also working on some beverages as well. So if you could speak in terms of that sort of product line that you might be interested in, that’s kind of like got you excited. Any thoughts you have on that be great.
CS: Sure. Well, many people don’t know but Dixie has been in the CBD business for probably five or six years. We created a product called Dixie Botanicals, many years ago. It was what I call it hemp 1.0. It’s a tincture CBD in a tincture type delivery vehicle. Then as we evolved, and we kind of moved away from that brand and that format, and we created really two different companies, one is Therabis, which targets pet wellness, specifically dogs and cats, and then Aceso hemp, which targets human CBD wellness.
And in both of those cases, we really move to what we refer as Hemp 2.0. So unique delivery vehicles, things that we believe are going to be very attractive to the consumer things, that are also easy to use and easy to dose and everything is very effect based. So it’s not just CBD, it’s also other active ingredients, botanicals, nutrients, things that are also FDA approved. So while we don’t really make structure function claims, Rudy, we actually are able to prove efficacy of these products, both on the natural ingredients… the non-CBD ingredients… in combination with CBD. So I think the industry in general, while we‘re all excited about the CBD opportunity, we still have to get through kind of the FDA obstacles and some of those things that are just normal in terms of building an industry which is what we‘re really trying to do this year.
RH: Okay, just while we are on the topic of products, I‘ve heard you mention it a few times. You all identify as more of a CPG brand versus like a candidates brand. Now how has the addition of folks like Greg Robbins, Oliver Arnold, how’s that kind of impact the trajectory of Dixie Brands? And how does it impact the identity? Why is it that they‘ll choose the CSO versus CPG brand versus like a typical cannabis type of brand? It’s kind of an interesting thing I picked up when you were talking, I was listening to the keynote, and I was hoping you can kind of address that.
CS: Sure. Well, look, our heritage is certainly people that came from the cannabis industry and have a passion for it. But we can see that the consumer profile is expanding at a really rapid rate. And we can also see famous brands that are coming into the industry. And those famous brands are going to be more familiar to your average consumer than maybe necessarily a cannabis brand, that they don’t really have a lot of familiarity with. For me, it was all about bringing in people that could enhance the existing heritage of our cannabis experience. So bringing somebody in like Greg Robbins, who was the VP of North America, Finance for Red Bull, or Hilal Tabsh, who actually also came from Red Bull and ran some of their distribution business.
These are people that are bringing not only that kind of experience, but also culture. So we want to take that culture that we‘ve built in the cannabis business and accentuate it with culture that can come from people that are coming from other areas and other industries. And that really, I think builds a powerful team.
RH: I love it. And since we‘re on that topic too, would you characterize your business model as asset light? You focus a lot on IP assets. You said branding, marketing, health, and here clearly, we‘re talking about human capital. That’s important. So would you say that that’s the case with your business model or you think that maybe that might be too — maybe that’s not the right way to describe it?
CS: I think look, if we compare ourselves to other segments of the cannabis industry, certainly cultivation or either in retail or dispensary, yeah, so those are asset-intensive type businesses. I think we‘re maybe a little bit in the middle. We clearly focus on IP formulations, innovation and building brands, which we think is a high part of the value chain. In order to execute on that we do have to have capital and CapEx investment in equipment, and this — and some of the things that go into actually producing these products in a very consistent way across all of our product formats.
RH: Okay, good, good. So you are in five states, or six states, Oklahoma, I think it was.
CS: So we‘re actively producing and selling product in five states, California, Colorado, Nevada, Maryland, and Michigan, which was our most recent state earlier in the year. And then we announced our entry into Oklahoma but we haven’t actually started producing product there. There’s a you know, a time it takes to kind of get things set up and understanding sort of the regulatory structure of the lay of the land and really being able to be in a position to start producing and selling product.
RH: So what are your next targets and what do you feel like maybe the next — what do you see as an MSO and what do you feel like the next states are going to be for Dixie Brands to get into? If you can tell us that, if it’s part of the secret sauce than…
CS: No, I always have to wonder what I can say, sort of as a public company CEO role. But look, as we look at expansion, I think it’s clear to say that if it’s a state that is got a high population growth — high population of cannabis patients or consumers, meaning recreational, or certainly one that has a lot of qualifying conditions where a broad array of portfolio products would be beneficial to those patients or consumers. That’s a place that we want to be.
Now having said that, our focus right now is really less on expansion for the sake of expansion, and more on focusing on the distribution platforms that we have, the routes to market that we have, and driving those to profitability, because the way this market is today as we know, it’s no longer the day of sort of investing in the future and to hope. It’s all investing in, what are you doing for me now? What is your EBITDA? What is your path to profitability? And so for us, we‘re very, very focused on leveraging all of the things that we‘ve built, that are giving us great route to market, but now putting all of our emphasis on making sure that we‘re maximizing that from revenue and profitability standpoint.
RH: All right, all right. One more geography question then, Khiron, Latin America, can you tell us a little bit about what you got cooking up over there? What do you think the direction is? You hear a lot about North America and Canada and U.S. But I think Latin America is an interesting point for a lot of investors. You see it as the next sort of frontier. So if you have any thoughts you can give us on that partnership, you got with them, Well, it’s a JV actually.
CS: It’s a joint venture. Yeah, thank you. And we love the guys — the team, I should say the team. There’s actually, I think more women in the Khiron management team than men. So I applaud Alvaro for that diversity, frankly. But we love the Khiron team. And it was a really good synergy between two companies that could complement each other.
Khiron has a really deep understanding of the regulatory structure throughout Latin America. As we all know, most of those countries haven’t actually legalized THC yet, but some of them are approaching CBD, some along a medicinal level. We just know Mexico is actually really running to try and get a legal framework in for recreational cannabis. Khiron has some very good connectivity in New Mexico. And so we could look at leveraging those assets and that experience that they have. And they in turn wanted to leverage what we do really well, which is have a broad portfolio of products, IP and technology, so that they have a fast first to market opportunity to bring products into their legal framework, as those frameworks develop.
For us, we also have the ability and right to sell their Kuida line of cosmeceuticals, which is a really high quality product. And as you know, in the U.S. topicals are a little bit more acceptable from the FDA and retailers‘ perspective right now then ingestibles. So it’s a really good complement to the distribution channels we‘re building to be able to start selling Kuida here in the U.S., hopefully before the end of the year.
RH: Sounds good. Okay. So it’s the hot topic this week, the Safe Banking Act. Can you give us some thoughts on that? I think it’s going to impact, obviously, it’s still just the House, we still need the Senate and President’s signature, but what does that mean, for the industry for Dixie Brands? Any thoughts you have on that would be great.
CS: Right. As you know, I just finished a little fireside chat. It was called the Leap Toward Normalization. And I think this is a great example of continuing to move toward normalization. The industry, as a whole is not going to be able to grow properly if it doesn’t have access to banking. And access to banking doesn’t mean just where you deposit your funds. It means the ability to get lines of credit and normal banking relationships. Ultimately set up things that banks could help with, like employee retirement plans and so forth. And banks can also be associated with investment banks as well as normal merchant banks.
I think that this is the first step toward that. Now what I‘m encouraged by is that even though the Republican side of the house did not vote to approve it in terms of the majority, there were a significant number of Republicans that crossed over the aisle to vote for this. And I think they believe that yes, it needs to be normalized and not having access to banking is a huge public safety issue that we need — it’s not, just not fair to people to have to deal in cash.
RH: Right, you touched on that actually.
CS: Yeah, it’s not fair to a company. It’s also not fair to employees. Fortunately, we‘ve never had to pay a employee, cash, because we‘ve had access to certain banking relationships. But it’s an unfair situation to put an employee that every two weeks you got to get a big envelope of cash and walk home with it. So I applaud the House for approving it, first pro-cannabis legislation approved by a branch of Congress. I implore the Senate to do the same thing, hopefully this year. And I have high hopes if the Senate approves it that the President will sign it because we know that the President understands that this is a state’s issue, and that this is an industry that’s here to stay, creates a lot of jobs, and it should be treated like any other industry.
RH: Makes sense. Okay. Well, just to close out, Chuck, I want to take sort of a wide angle, high level view. What does the future hold for the cannabis space? And how does — how do you envision Dixie Brands fitting into it?
CS: Look, I think, our best days are ahead of us for sure. I do think that there’s headwinds, and we have to be resilient. We also have to work together right? As an industry, yes, we can be competitors. But we also have to be, cooperative, if you will, if we‘re going to really build this industry to where it should be. And we‘re too early days to be fragmented or fractured on that.
I think that we see more and more consumers, they use the term cannacurious. I guess that’s a great term. But the reality is they‘re just looking for alternatives to what they do in their normal life today outside of the cannabis industry, whether it’s alcohol or its pharmaceutical drugs or other wellness platforms. And so they see cannabis as an opportunity. And we need to give them that opportunity by being responsible, safe, compliant, but also building this industry in a way that it has access to all, not just consumers, but people that want to work into it.
So social equity programs, diversity, inclusion, the things that are important to actually cast a big net and have a lot of folks that can participate in it. Again, whether they‘re working and benefiting from that or they‘re a consumer with a lot of options. I think Dixie is going to play a really important role as a house brand.
RH: Thanks for the insight, Chuck. We really appreciate you coming on board.
CS: Thanks, Rudy, I appreciate it.