California marijuana company Vertical is talking to banks about an IPO for its CBD business and just raised a fresh $58 million in preparation

Courtesy of Vertical

Vertical, a California marijuana producer, closed a $58 million funding round, led by Merida Capital Partners.
Smoke Wallin, Vertical’s president, said the round will lay the groundwork for the company to spin off its hemp and CBD business into a standalone entity.
They’ll seek to list the CBD business, Vertical Wellness, on the NASDAQ by the fourth quarter of this year.

Vertical, a California marijuana producer, closed a $58 million funding round to lay the groundwork for its hemp and CBD spinoff to go public on the NASDAQ this year.

The series A round was upsized from $20 million to $35 million last year and was still oversubscribed due to investor demand, the company said. The round was led by Merida Capital Partners, a New York City private equity fund that exclusively invests in the cannabis industry, with the rest of the capital coming from a mix of high-net-worth individuals and family offices.

Smoke Wallin, Vertical’s president and the CEO of the incoming CBD spinoff, Vertical Wellness, told Business Insider in an interview that despite widespread interest from institutional investors, the bulk of the round came from family offices that aren’t bound by the same rules that a large private equity fund or hedge fund typically is.

Wallin said while they met with a lot of special situation groups at larger hedge funds — which he said have a "broader mandate" to pursue unique investments — they didn’t end up participating in the round.

"We got great meetings and spent a lot of time getting them up to speed on our industry and then obviously our company," said Wallin. "But at the end of the day, their in-house counsel and outside law firms couldn’t see a way to go forward given the federal prohibition that it still exists. That was pretty much universal."

Vertical will use the new capital to build out new grow facilities on their California campus, and finish building a food and beverage manufacturing facility, said Wallin.

"These are some of these things you might say, well, why are you raising equity to do capex [capital expenditures] and to build buildings," said Wallin. "Well, that’s because we’re in cannabis, right? Like you can’t go get a mortgage, you can’t get normal financing on equipment" like in any other industry.

Most THC-touching cannabis companies in the US are unable to use debt financing for any capital expenditures because THC is federally illegal, and banks are unwilling to risk working with the industry.

Congress is debating a few pieces of legislation, namely, the SAFE Banking Act, that would alleviate some of these problems but the bill’s path through the Republican-controlled Senate looks uncertain.

Since the Farm Bill passed last year, hemp and hemp-derived CBD were legalized in the US, and the Food and Drug Administration is working on a pathway to allow CBD to be added to food products.

While Vertical will remain focused on California, which Wallin said is the biggest cannabis market, the company is also investing in assets in Arizona and Ohio which both recently legalized medical marijuana.

"But we eventually want to have a foothold in all the legal states," said Wallin.

What Wallin said sets Vertical apart from other cannabis companies — namely, the big publicly traded Canadian companies like Canopy Growth and Aurora Cannabis — is that they look for "distressed" deals, where the operators may hold a valuable license but may not be operating efficiently.

"Then we’ll step in and fix that," said Wallin. "The difference between me and the Canadians is that we don’t overpay."

An IPO in the fourth quarter of this year

Wallin said he’s looking to raise another $50 million in a private round in the coming months to prepare for the initial public offering. He’s aiming for the IPO to happen in the fourth quarter of this year, though he cautioned that "would obviously be very fast."

Though Vertical has not selected bankers for the IPO, Wallin said he’s in talks with Cowen and Canaccord Genuity, which have been active in the sector. He’s also had discussions with major bulge bracket banks who see the Farm Bill as a path to getting involved in the CBD side of the industry.

"I think we’ll meet all the criteria that NASDAQ would require," said Wallin. "So the idea is to get everything lined up and have scale. We’ll be very, very profitable next year — so I think we’ll have a great story to tell the street."

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