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Interview with Chuck Smith, Co-Founder and CEO of Dixie Brands

Find more at @David_Kretzmann.

Run time – 26:21 (Transcript below)
Published 10/31/2018

 

Transcript:

David Kretzmann:           David Kretzmann here at the headquarters of Dixie Brands in Denver, Colorado, and I’m joined by a special guest, Chuck Smith, the cofounder and CEO of Dixie Brands. So Chuck, thanks so much for welcoming, welcoming me here to the company. Just got the tour through the Willy Wonka facility here, the Willy Wonka of cannabis. So I figure we can dive right into it. Maybe you can give us a background of how you got involved in the cannabis industry and what led to the founding of Dixie Brands.

Chuck Smith:                    Sure. Well, David, first and foremost, thank you for being here in Denver and Dixie Brands. We’re excited to be able to talk to you and your subscribers at The Motley Fool, so really appreciate that. Dixie, it’s been an exciting ride. We’ve been in this business for nine years, so some people would kind of consider us the OG, if you will, of the industry. We are and have always been an infused product manufacturer. We’ve really built this company on the backbone of delivering high quality, consistent and very enjoyable products initially for medical users in the state of Colorado and now it’s broadened to both medical and recreational consumers. We have a very broad portfolio of infused products, really, over a hundred individual product types that are spread across about 13 different delivery systems or categories such as a chocolate bar would be a delivery system and we may have 10 flavors of chocolate bars.

And the company was also founded really on a platform of drinks or beverages, which I know is the craze now. Everybody’s talking about drinks. The good news is we’ve been doing it for nine years and we understand how to deliver effective, homogeneous, very tasty drink products in various formats to a broad consumer base. So that’s really who Dixie is, an infused products manufacturer really moving to be a probably one of the largest consumer product good companies in the industry.

David Kretzmann:           And what pushed you to focus on that infused product strategy or the edible strategy? Because with within the US and Canada, there almost seems to be an obsession with vertical integration. But in this case you’re basically saying, no, we’re not going to grow up. We’re only going to focus on certain aspects of the value chain, so maybe just walk through what was the process to come forward with that strategy?

Chuck Smith:                    Sure. When we started the company, again. nine years ago in Colorado, we did have the access to all of the licenses that allow us both to grow and to distribute through retail, but we really made the decision, my partner and I, that we wanted to own the space of delivering as a wholesale manufacturer, high quality products. And again, whether they be an ingestible products like a food product or topical products that really don’t provide any euphoria, if you will, but do provide great pain relief and muscle relaxation. So that was really the niche we decided, and I kind of coined my own phrase a long time ago, you know, I’d rather be the baker of bread, then the grower of wheat. And frankly there’s a lot of companies here and now across the country and the world that have invested significant capital to be really high quality growers of cannabis.

There’s no way we could compete with them. So I would rather use those relationships as our supply chain, our dependable supply chain of inputs for our product. And then on the other side, the retail side, again, we made the conscious decision that we didn’t want to just sell to a couple stores, we wanted to sell to all the stores. And so if we can build a great distribution team, sales team, with a great product portfolio then then we can sell to all the consumers regardless of whatever store they go into. And that’s really our strategy.

David Kretzmann:           So maybe talk about that a little more. Where are the products currently sold, which states, and then what kind of stores are the products currently available today? And where do you want to be, say two or three years from now where you’re not currently selling?

Chuck Smith:                    Sure. David, thanks so much for that. The company currently sells in four states and here in the US it’s a bit of an inefficient model. So the only way that we can actually sell our Dixie branded products in estate is if we either have a license or partner with a company that has a licensed to do business within that state. So as a result, we have to build kind of one of these Willy Wonka factories that you’ve just toured in every single state that we want to do business in because right now in the US, because it’s federally illegal, we can’t build a product and ship it across state lines. So as a result, we look for really good partnerships. So today we’re in California, Nevada and Maryland, Maryland because we wanted, we’ve had a great partner in Maryland, Acurio Wellness that is a Pharma oriented group. It’s a very medical regime there. They’re a high quality, great, great partner of ours and we wanted to plant the flag and the east coast as well. So we were kind of a bi coastal company.

So that’s where, where we are today in terms of our footprint and more specific, for example, in Colorado there’s about 600 operating dispensaries in the state of Colorado. I would say Dixie’s in about 450 of those on a consistent month in month out basis. So it puts us in a really good position to serve the broad consumer that comes into Colorado, whether they’re are existing medical customer or a recreational consumer that comes into the state.

Where we want to go in the future, we’re very excited about the future. We’ve just completed a significant fundraising round and the company’s on a very clear path for a public listing in Canada. With that access to capital, our intention is to open four to six new states during the year of 2019. If we’re able to do that, and meaning we’ll own the manufacturing and then the distribution, meaning the sales, feet on the street distribution in each of those states, that’ll put Dixie as probably the largest manufacturer with a in terms of a footprint across the US in the industry being meaning we’ll be operating in eight to 10 states.

David Kretzmann:           Nice. And can you give us just an overview as far as the breakdown between the recreational products that you’re selling versus the medicinal or CBD base products? What does that look like?

Chuck Smith:                    Again, it’s unfortunately here in the US, a little bit of a state by state answer. The great news is Dixie’s portfolio is able to format either in a medical market or a recreational market or serve both. So what I mean by that is here in Colorado as an example, you know, we know you know that we’re both. We have both a medical regime as well as a recreational regime, and our mint product, which is a low dose, hard type mint that you put in your mouth, it dissolves and you can either get to see THC with that or CBD and it has a number of different indications based on some of the additional herbs that we formulate into the process. So either an awakening mint, which gives you energy or relaxing, which helps you sleep. That exact same product for recreational can be formatted from Maryland, which is a very structured medical market where instead of calling it a mint, we call it a tablet and the packaging may not be quite as colorful and attractive to meet their regulatory standards, but the exact same product formulation transcends both states. So we’ve really tried to build the portfolios so that it would match either of those types of marketplaces.

David Kretzmann:           And which of your products right now have been most popular with consumers and maybe what are some up-and-coming categories which are starting to gain more traction at maybe an accelerated pace?

Chuck Smith:                    Sure. Again, we built the company on our, on our drink platform, so that’s always been a flagship for the company and as we move forward we’re innovating new formats of that drink to where we can have lower dose products or maybe almost like an energy shot type of a product. So it’s a smaller format, lower dose. Because I think as the market expands and the demographic of the industry expands, right from the consumer’s perspective, you’re finding a lot of people coming into the industry now as consumers that want cannabis, not purely for recreational, they see it as a part of their wellness platform. Whether it’s a sports recovery type, a program, or just an overall general wellness and health program, that’s why we have a lot of products are formulated with high CBD ratios that are really don’t provide euphoria as much as they do anti-inflammatory and relaxing type properties.

So we’re really focused on providing a broad, diverse portfolio. And many of those products are low dose, so as a consumer comes in and maybe they want to, you know, substitute their couple of glasses of wine at night for something different, they can take one of our men so low dose five milligram mint and get kind of the same level of enjoyment in a very discreet way. And, you know, potentially move away from alcohol is their only platform for recreation.

David Kretzmann:           Got It. And as you alluded to earlier, the company is still private. It was one of our debut companies on our private company watch list. Any idea of a timeline for when you might go public up in Canada or just how you’re approaching that whole process in the coming months?

Chuck Smith:                    Well, first of all, thank you very much for debuting us on your private channel. We’re certainly very proud of the company. I think, you know, one of the things that makes us a little different than some of the others, we have been around for nine years, so we’ve been doing this for a long time. Building standard operating procedures, building formulation, really building significant IP. And the company also is very diversified. It’s not just the THC portfolio under Dixie Elixirs, but we also have to CBD companies that roll up. One is a human dietary supplement called Acessa Wellness. This is made with industrial hemp derived CBD. So no THC, totally legal for us to manufacture and distribute all over the world. Certainly other than unfortunately in Canada, which still considers all forms of CBD Schedule One or federally illegal, but in most certainly across this country. And in many countries, CBD from industrial hemp is actually a legal format.

And then we also have a third company called Therabis, which is our hemp derived CBD wellness platform for pets, primarily dogs right now, but at the end of the year where we’re introducing a product for cats. So all of that together allowed us to just complete a very successful Series C private placement. We raised $25 million dollars on an $80 million pre money valuation and we at the same time as we closed that, announced our merger with our public shell up in Canada. Our expectation is that the company will be approved by the CSC enlisted before the end of November. Obviously fingers crossed because we want to get a beyond the kind of fundraising aspect and get back onto the business of growing and building the business. but it’s really now up to working with the CSC to get our final listing statement approved.

David Kretzmann:           And following up on that, obviously right now the industry is still in heavy reinvestment mode, just building new facilities, gaining traction in new states and territories. As the product is legalized. What is your approach to capital allocation at this point? As you mentioned, you just raised a nice chunk of new money, so what’s your strategy for deploying that in just your overall approach to capital allocation?

Chuck Smith:                    I think again, one of the things that differentiates us a little bit maybe from some of the companies that are in the industry now and certainly much bigger, bigger valuations and so forth, everything that I’ve talked about so far in our conversation are products that are actually in the market generating revenue. We’re not putting a lot of money to innovate a drink or to develop a pet line. These are already products that are highly formulated, highly curated, a commercialized and now out in distribution channels, whether direct through regulated THC channels or more broad distribution channels like a specialty pet distributors and so forth. So I’m very excited about the fact that we have this tremendous platform and portfolio of products that we can now take the money that we have raised and that we will have access to in the capital markets and put the majority of that money into revenue producing distribution.

So that’s either building up sales forces in states that we’re currently in and marketing programs to get product on shelf and connect with consumers or as we move forward, as I mentioned and open up this four to six new states in 2019, we’ll actually build the infrastructure and in partnership with a licensed producer, really own and control the manufacturing and distribution in each of those states. So we’ll be investing in the capital equipment to produce the products and investing in the team on the street to actually go sell that portfolio of products into dispensary’s.

And we’ll continue to innovate of course. And we’ll really look probably to expand the portfolio through acquisition because again, I think we have a great value proposition to someone that might have a really nice brand in California, but wants distribution across the country. Instead of having to build it, they can partner with us because we can get them into distribution by the end of next year by into eight to 10 states.

David Kretzmann:           And up in Canada. You also have a partnership with Auxly Cannabis. So just curious, obviously at this point, the Canadian recreational landscape for edibles or infused products is still murky at best, but just curious how you see that partnership unfolding with Auxly and maybe what you expect from the Canadian market over the next three years or so.

Chuck Smith:                    Well, first and foremost, thank you for asking the question because they’d have been really mad at me if I didn’t bring it up.

David Kretzmann:           Helping you out. I appreciate that.

Chuck Smith:                    I love the guys at Auxly. Hugo and Michael I’ve known for quite some time and Chuck Rifici, the CEO. Uh, it’s just a tremendous company and with a tremendous path to the marketplace. We’re both working together now with their licensed producer and research facility, Dosecann can to figure out the formulation of products that perhaps we can bring into the market earlier than the infused products are going to be available. And clearly it’s up to Health Canada and the regulatory oversight to develop the rules and regulations that will allow infused products to be sold. But the great news is, again, we don’t really have to wait until all those rules and regulations are in place. We can start building the facilities. We can start getting outfitted for that because we already have the formulas. We already understand the packaging and frankly here in Colorado, fortunately even though it’s a very regulated state, we’ve built the packaging, the labeling the formulations to almost the highest level of standard that anybody could implement.

So I don’t think that the regulatory agencies in Canada are gonna throw us too many curve balls that we aren’t going to be able to pick up quickly and field. And that means we’ll be able to rapidly get to market once those rules are identified. But again, I know that the Auxly folks are keenly, okay, interested in working with us to see how quick we can get some products into the market while we’re waiting for all the regulations to be formed.

David Kretzmann:           Yeah. And what would you say is the most common misconception that you hear about Dixie Brands? Whether it’s from investors, the media, if you don’t have something specific to Dixie, maybe just the biggest misconception that comes up about the US cannabis space.

Chuck Smith:                    Well, I, I have heard some folks say that maybe you know, the company is too small, right? And a little bit of that is because, first of all, it is the US and it is a very fragmented industry still. We didn’t build the company in California, which is clearly a very high population state. We actually built it here in Colorado and then have started to expand it into these other states. So I’ve heard some people say, well maybe the company’s a little bit too small compared to some of the, you know, massive companies and many of these vertically integrated companies that you’re speaking about. I would say that Dixie’s best days are ahead, right? Because it wasn’t our intention to build a size of company based on a vertically integrated model. I want to do business with all of those vertically integrated companies because I think consumers are going to fly into, one day, they’re going to be able to leave New York flight of Boston, fly to Denver, fly to San Francisco, and then fly back up to Toronto and in every one of those stops, if they’re 21 years or older, they’re going to be able to buy cannabis and they’re going to look for a trusted store.

But if they don’t find that trusted store, they’re going to go into another one and they’re really going to look for as a trusted brand. And I want Dixie to be that trusted brand. So I think as we now have access to this capital and we’re able to execute our strategy, you’ll see Dixie’s growth curve go up significantly. And again, I remind you and your listeners, we’re not a one trick pony here either. This is not just a portfolio of THC products, these are products that meet the ever expanding and huge market of CBD wellness users, whether it’s humans or pets and so again, I’m excited about Dixie’s future for that reason.

David Kretzmann:           Nice. And within the US, how would it impact your strategy or approach if say in the next two years or so a cannabis is decriminalized on a federal level? Would that dramatically impact how you approach this state by state strategy or would you essentially keep plugging away doing what you’re already doing?

Chuck Smith:                    Well, some people see the, kind of the regulatory structure right now and the federal schedule one a situation as a barrier to entry for others and I guess to some extent we see that too, right? We want to build our footprint. We want to really get out there to where we can take advantage of what we’ve built up to this point before all the rules change and you know, the big guys can come in. I hope when the big guys come in, so to speak, they find a lot of value in what we’ve created both in a portfolio of brands as well as the distribution model.

But having said that on the other side, a Dixie and myself personally are very active through the Cannabis Trade Federation, which were founding board members, have to try and get the States Act approved. And the States Act as a bipartisan legislation between Senator Gardner and Senator Warren that would actually treat alcohol or treat cannabis, pardon me, like alcohol, meaning even if it’s not federally legal at a state level, if it’s legal, then those operators in each state would have access to banking, which is a very big hindrance to our growth. And also would have a normal tax code as opposed to being penalized by the 280E tax code that the IRS imposes on cannabis businesses.

If we just get that done, number one, we’ll increase public safety because we won’t have all this cash floating around the system. Number two, I think we’ll more clearly identify who the bad guys are from the good guys, which is really what the intention should be on legalizing cannabis to begin with, getting rid of the black market or even the gray market. And then finally being able to operate our business like any other business in any other industry. We’re creating hundreds of thousands of jobs and millions, if not close to probably across this country, you know, billions of dollars in tax revenue. We ought to be actually have a break and be able to treat it like  any other business in this country.

And so if we can get tax code normalized and access to banking, then this industry is going to just sprint ahead regardless of whether, you know, we finally regulated at a federal level or not.

David Kretzmann:           And if that States Act doesn’t get improved either next year or whatever that timeline may be, would that impact your strategy as far as entering new states or would that really make it easier to export across states or how would that change kind of that the operational landscape for Dixie?

Chuck Smith:                    Sure. I think everybody looks at that crystal ball and just, you know, which, which bet do we make? I think from our standpoint, our bet is that we want to actually have a distribution team that’s connecting with every retail location and really connecting with the consumers that go into that. So I think that you’ll see Dixie, even if there’s a ability to have a more normalized manufacturing footprint and ship across state lines, I think this will still mirror alcohol where it’ll be state based regulations from a distribution standpoint and it may be national or regional footprint for manufacturing. And so I think our best bet is to get out there, get our, get our brand planted in every state, really have a high quality sales team and really a company that’s easy to do business with. And if we can do that with a big portfolio of products that meet the ever expanding needs of the consumers, then I think Dixie is going to win in the long term regardless of where the regulatory framework lays out that.

David Kretzmann:           That’s a perfect tee up to my final two questions. First of which, just as, as a background, as you know, The Motley Fool as a community of investors helping fellow investors and we take a long-term business focused approach within the cannabis industry. So for business folks, investors like us, once Dixie Brands does go public, hopefully sooner than later, what metrics should business-focused investors like us pay closest attention to, to best gauge the underlying health or progress of the business over the next five years?

Chuck Smith:                    I think that we would, you should look at initially, um, a revenue ramp and really a access to markets because we’re gonna be investing, as you said, we’re going to be reinvesting in the business to build that brand. And so when you build infrastructure, you have to build distribution, you really have to build brand and you really have to build that brand in an environment that doesn’t allow us a lot of traditional marketing and advertising. So you have to find creative ways to reach that consumer. And a lot of that’s sort of hand to hand combat. We have to be in the dispensaries, we have to find ways to influence the consumer and educate them because I think that’s the biggest challenge that we’re facing now as an industry. It is a state by state fragmented kind of approach. And with heavy restrictions on advertising, it’s really hard to connect with that consumer and help them understand your brand promise.

So that can be expensive and we’re going to invest in doing that. Again, we don’t have to invest as much in the R&D side of it to actually deliver the products to them because we already have them. But we have to invest in the infrastructure and the marketing to build that brand awareness and that education. So I think, you know, your investors and as I talked to investors, you know, we have a long view. We’ve been in at nine years, so we certainly have had a long history and a long view that way.

So I think our top line number and our top line growth and our expansion on a state by state and a country by country basis is a really good indicator over the next year or so. I think at that point as we then start looking at [Evada 00:23:39] and all those things that people want to look at the bottom line, which clearly I want to be focused on as a responsible leader of a business to ensure that we’re actually building these products profitably. And then we’re running our business efficiently. And again, I hate to be redundant, but you know, nine years allows us to understand actually how to make these products in the most efficient method possible to drive the highest gross margin. The inefficiency comes with the deployment of capital to build our footprint, but that ultimately catches up as revenue start to decline.

David Kretzmann:           Yeah. And final question for me, and we’ve talked about a lot of different initiatives happening within the industry, especially within Dixie Brands, but what personally gets you most excited looking out over the next five years?

Chuck Smith:                    You know, a couple things., David. First when we originally got into this business, in all candor, my partner and I kind of looked at it as initially kind of a passive investment. We were excited to do something, to kind of build a company and build a brand, but we really weren’t looking at it in long term, but relatively quickly after starting and getting kind of testimonials from people about how our products were changing their lives and helping them, you know, either try and break an opiate addiction or just pain management or just overall enjoyment, we started to say men were onto something. And then you layer on the fact that we actually have a chance, all of us in this industry, even you right?, reporting on it and doing the great work you’re doing, we have a chance to end prohibition. How many people in their lifetime have a chance to have such a transformative impact on history? Even if it’s just, you know, we’re a small footnote to it. The reality is I think Dixie has long been a company that wants to do it right in this industry and set a standard.

so I get up every day, you know, excited that of what we’re building, excited of the history I hope we’re creating. And now more importantly, as we’re growing, exciting for the opportunities that we’re giving to our employees. We’re bringing in a group of people in a company that’s now going to employ hundreds of people that also get up every morning and are excited about the future and excited about what this industry is going to provide. So, you know, I don’t ever wake up not wanting to go to work. I can tell you that.

David Kretzmann:           Well, that’s a great note to end on and certainly here at The Motley Fool, we look forward to following Dixie’s progress in the quarters and years ahead. But Chuck Smith, Co, founder and CEO of Dixie Brands. Thanks so much for taking the time and certainly hope we can continue the conversation moving forward.

Chuck Smith:                    Thank you David. Anytime.