It took longer than expected — two years longer — but Vertical Wellness, a company specializing in cannabinoid-based wellness and health products, is finally going public via a merger with Canafarma Hemp Products Corp., in a deal that will make it the first house of CBD brands to be publicly traded.
The combined company is expected to be worth more than $50 million and will retain the Canafarma name /zigman2/quotes/217364163/delayed CA:CNFA 0.00% , while the brands will keep the Vertical Wellness name. Canafarma went public in March of 2020, unfortunate timing for an IPO, coming just as the coronavirus pandemic was causing shutdowns.
Vertical Chief Executive Smoke Wallin, who will run the new company along with his management team, said they have used the downtime to “get our brand house in order,” including signing up supermodel-turned-entrepreneur Kathy Ireland as a partner.
“Kathy has a huge following, she has the 26th largest license brands company in the world and did $2.9 billion of product sales last year,” Wallin told MarketWatch in an interview. ‘We’re super excited to launch her flagship CBD brand later this year.”
Wallin is somewhat of a brand expert, after spending years in the booze business, where he built National Wine & Spirits into a $1 billion company and was chairman and president of the Wine and Spirits Wholesalers of America. That experience has taught him that with consumer products, it’s all about distribution. The company had hundreds of sales representatives and contracts with large-scale distributors to ensure it had the reach to make the business successful.
Vertical Wellness and its products were separated from Vertical’s original lineup, which included a range of THC-based brands, that is now being developed by a separate team. THC and CBD are ingredients found in the cannabis plant; THC is the psychoactive ingredient that creates the “high” associated with cannabis, while CBD is nonintoxicating but is widely held to have wellness benefits.
The wellness brands include the Organic Candy Factory, a line of gummy bears made without chemicals, artificial colors, flavors or sweeteners, which Vertical acquired last November. It also includes LapDog, a line of CBD products for dogs, a skin care line called Halogenix Beauty, and Just Live, a line aimed at athletes.
Vertical, with operations in California and Kentucky, has cultivated more than 1,800 acres of hemp on its partner farms in 2020, making it one of the biggest processors of hemp globally with more than 22 million pounds owned, processed or contracted.
The company was originally aiming to go public in the third quarter of 2019, and came close to a deal with a special purpose acquisition corporation, or SPAC, that fell through. “We were left at the altar and were caught a bit flat-footed,” Wallin acknowledged. Then in 2020, the pandemic shuttered retailers, creating a new set of challenges.
The new company will trade on the Canadian Securities Exchange, or CSE, which has become the favored destination for U.S. companies that are unable to list on major U.S. exchanges as long as the cannabis plant is classified as a Schedule I drug, which classes it along with heroin.
Hopes that the federal ban would be lifted under the administration of President Joe Biden helped fuel a rally in the sector late last year and early this year, that was boosted by comments from Sen. Majority Leader Chuck Schumer that he would prioritize cannabis reform during the current Congress.
Wallin is also hoping for clarity on the future regulatory treatment of CBD, which is in a sort of limbo ever since passage of the 2018 Farm Bill, which legalized hemp, but not CBD. Instead, regulation of the substance was moved to the Food and Drug Administration from the Drug Enforcement Administration.
The FDA immediately warned companies that it would not allow CBD to be added to food and beverages, because it is the main ingredient in the only cannabis-based drug to win FDA approval, GW Pharmaceuticals PLC’s Epidiolex /zigman2/quotes/202658513/composite JAZZ +0.49% , a treatment for severe types of childhood epilepsy. That makes it a drug in the eyes of the regulator.
The FDA has promised a regulatory framework and suggested it may not take the route of requiring clinical trials that would take years to complete, but it has been slow to follow through.
“It’s one of the biggest challenges the industry has faced and really put the kibosh on a lot of innovation and products coming to market,” said Wallin. “It’s meant that CBD products can’t get access to big retailers.”
Some recent developments look hopeful, however. In January, Molson Coors Beverage Co. /zigman2/quotes/205165133/composite TAP -0.02% announced a line of CBD drinks with Hexo Corp. /zigman2/quotes/206508254/composite HEXO -6.04% /zigman2/quotes/200008967/delayed CA:HEXO -6.22% And in April, Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -4.70% /zigman2/quotes/202205609/delayed CA:WEED -4.84% announced a partnership with Southern Glazer’s Wine & Spirits to distribute its U.S. portfolio of CBD-infused beverages. Southern Glazer’s is one of the biggest wine and spirits distributors in the U.S.
“When you’ve got companies of that scale regulated at federal and state level, it tells you one of two things; either they know something, like the FDA will change position or there won’t be enforcement,” said Wallin.
One big lobbying group that is likely opposing any part of the cannabis plant being used in wellness is Big Pharma, he said. Drug companies do not want competition for treatments for anxiety, sleep problems and pain, all of which earn them billions of dollars a year.
“Natural solutions are the enemy of pharma and I think they are the major reason for a slow FDA,” he said.