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Vertical President on Farm Bill Passage and US Industrial Hemp Legalization

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Vertical President Smoke Wallin shares his thoughts on the recently passed Farm Bill. Wallin cautions that the terms of the agreement are not as advantageous as some had predicted; significantly, the FDA still has purview over products made with derivatives. However, Wallin anticipates extract production becoming a dominate industry in the United States, displacing current European imports. In the short term, he predicts that the passage of the Farm Bill will lead to increased hemp cultivation, but because of current infrastructure inefficiencies there will be delays at the processing level. Vertical invested heavily in hemp production in advance of the Farm Bill and is currently processing mass amounts of CBD oil to use in its branded derivative products. Vertical is spinning the CBD aspects of its business into Vertical Wellness, which will be going public, while its California-based cannabis assets will remain private.

Transcript:

Ben Smith:    Welcome, everybody. We’re here with a special guest named Smoke Wallin. He is the President of Vertical Companies, a California cannabis company, and he joins us from Bowling Green, Kentucky today. Smoke, how you doing?

Smoke Wallin: I’m well, thank you. Glad to be here. I’m actually on a road trip to see my family and happen to be passing through Kentucky, so that’s the side of the road to do the interview.

Ben Smith:    Well, that’s a very apt location, because I understand Kentucky is pretty much the home of hemp. It’s a huge market in there, and I was wondering if you could tell the audience what the Farm Bill, and hemp production especially, means for your home state of Kentucky, and for the national landscape in terms of how it’s going to affect cannabis stocks.

Smoke Wallin: Yeah, absolutely. I mean, the Farm Bill is monumental in terms of what we can do now in terms of hemp and the derivative product, CBD, is obviously the hot topic of the day. But what the Farm Bill basically did was, it took what was a pilot program in 14 states and took that away and made it a 50-state agricultural product that can be grown anywhere in the country.

Now, it hasn’t solved all the issues; there’s still quite a few regulatory hurdles that have to be worked through. The FDA has come in yesterday and asserted that it still has purview over product that are derived from cannabis and hemp. But that being said, it’s a huge step forward for the industry, and it’s a huge move for both the farm community who would like to grow it, but also companies like ours who would like to take the product and turn it into brands and put it into stores and all kinds of accounts and bring it to the public.

Ben Smith:    Now, what do you think this means for the price of CBD oil? I mean, to me, that’s one of the better narratives about this whole story, because right now, I think, you know, CBD oil, a lot of people would like to try it. There’s a lot of therapeutic benefits to it – a ton of people. But the price is a little bit disqualifying to a lot of people I know, as well. 30 milligrams might cost anywhere between $80 and $120 American. Now, do you foresee CBD oil, with the mass cultivation of hemp fields and crops, do you think the prices are going to come a lot lower as we head to the back of next year?

Smoke Wallin: I think they’re going to come down over time, but to be honest with you, we’re gong to see a lot of hemp growing in the farm side, but there’ll be a bottleneck at production and processing, and that’s one of the things that we’re investing heavily in, is that we can take the raw hemp, dry it quickly, and then process it into other CBD oils and other derivative products.

Until that happens, until there’s enough capacity and an ecosystem that’s built up to process large quantities of hemp, which there is not today in the US, the price is still going to be relatively high.

Now, that being said, a lot of the CBD products that you see in the marketplace were coming from overseas up until now because of the prohibition against growing hemp and extracting hemp and extracting it here in the US, I think going forward, you’re going to see US-grown hemp dominate the space, and it’s going to be a very positive thing for US farmers, but also people like us who are creating brands. I don’t mind my cell phone coming from China, but I don’t really want to consume products from China in my body. So I think we have a great argument to bring, you know, US-grown hemp products to market.

And yes, over time, the price will come down, but again, the bottleneck is this processing side of things, and until that’s solved, and it’s going to be solved with a lot of capital investment.

Ben Smith:    Okay, so I guess what I’m hearing is that prices may not necessarily come down in 2019 all that much, but going forward, perhaps 2020 and beyond, when that feedstock really gets accumulated, then it’ll be more of a gradual decline in prices. It’s not just going to drop 50 percent next year or anything like that; it’s more of a time delay on that.

Smoke Wallin: For sure, it’ll take some time. And look, it takes years to build out an industry, right? So it’s not like overnight there’s going to be a big ecosystem that’s built out. That takes time, a lot of money is going to come into the space, and the other thing is, think about this: right now, up until now, you were able to get CBD products at, you know, maybe convenience stores, certain spots, you were able to order it online, but there was a very unregulated market, and because of the gray and, you know, unclear rules state by state, you have a lot of products that consumers didn’t know what was in them.

So what’s happening with this regulation is, there will be visibility of seed to sale, both of product, where the product came from, and what’s in the actual bottle, and proof of testing of what’s actually in. Because it’s very important for the industry to mature, that consumers become confident that what they’re getting is real CBD at the quantities that are being said on the labels, and that they know they can rely on whatever they’re buying.

For this go to go mainstream, which we believe it’s absolutely going to do, a regulatory infrastructure, led by this Farm Bill, is absolutely essential.

Ben Smith:    Perfect. Now, some mainstream analysts are predicting the market to be anywhere between, say, $20 billion and $25 billion in 2020. Do you think that’s a realistic target, or do you think those estimates are a little bit unreachable or aggressive at this point in time?

Smoke Wallin: You know what? I don’t like to give an exact number. I know it’s going to be billions of dollars, right? And you know, but you think about it: right now, Walmart, Walgreens, CVS, Target, Marriott Hotels, all the mainstream, large-scale places where people buy their product or consume their product or consume different things, spas and things, have not really carried CBD because of the regulatory prohibition against it. So we have no idea yet what the real market is going to be, because so many outlets that could carry it, have not.

It’s in the tens of billions, I don’t think it’s a stretch to say it’s $20 billion or $25 billion. Whether it gets there by 2020 or 2022, your guess is as good as mine, but I think it’s absolutely going to be many billions, and it’s going to grow very quickly.

Ben Smith:    Okay, so where are you with your company in terms of branding? You were speaking earlier that vertical companies intends to brand CBD products; are you ahead of the game in that regard compared to other companies with branding those products? Have you been seeing the Farm Bill passage as sort of inevitable and anticipating your next moves in regard to, you know, feedstock capacity, upgrades, going into next year?

Smoke Wallin: Right, so we made a bet early this year and invested heavily here in Kentucky, western Kentucky, on a hemp grow. We just harvested 100 acres of hemp in October; that’s produced almost 100,000 pounds of biomass that’s sitting in our 90,000 square foot facility just down the road from where I’m sitting, and we’re in the process of processing that into CBD oil. Now, that’ll probably be in the neighbourhood of $20 million of CBD oil at wholesale, but we’re putting that oil into our branded products.

So I have brands that are rolling out in January, I’ve got 2 brands going into 1,000 convenience stores at the beginning of the year as an initial test, and we had put those wheels in motion six months ago in anticipation of this Farm Bill passing. Now I didn’t know for sure, but we believed that it was inevitable, it was going to happen eventually, and if it didn’t happen now, we would probably hold back on some of our plans. But we made the investments early, and we do think that gives us the leg up.

Right now we’re working with farmers throughout Kentucky and other surrounding areas to lock up probably about 5,000 acres of hemp production for 2019, which, you know, eight months to process, will probably be in the neighbourhood of $1 billion of CBD oil that would go into various manufactured products, some of which would be our brands, but also think about the other mainstream companies that are probably going to get into this: Coca-Cola and Nestle and PepsiCo and, you know, a wide range of other consumer packaged goods companies that have brands that probably are going to come out with a line extension that have a CBD version in it.

They’re not going to probably do it in January, but I think it’s going to happen fairly quickly, and we want to be that provider to them, a large-scale, predictable ingredient provided to those guys, and then also building our own brands that we’re putting in stores directly.

Ben Smith:    Now, are you a public company right now, Smoke, or are you still on the private market, or any plans to go public if that’s the case?

Smoke Wallin: So today we’re a private company based in California. We expect that, with the Farm Bill passing, that all of our hemp and CBD assets, that we’ll be able to take that into its own entity, which we’re calling Vertical Wellness, and that entity has every, we have every intention to bring that out into the market, you know, in early 2019. We think the timing is right, and with the Farm Bill passing, institutional capital, hedge funds, large corporations that have been prohibited from investing in the space in the US will now be able to invest directly in the space. So we think we’re in a really good position to attract capital and to scale this operation as this thing goes mainstream.

Our cannabis assets, which are primarily in California but also in Arizona and Ohio and we have some interests in some other places, but primarily in California, that will stay private in the short term because of the Federal prohibition that still exists.

But I do agree with Acreage’s CEO Murphy that there’s a good chance that that Federal prohibition will be repealed in the next 12 to 18 months, and in that case we would be in a position to take that public. But right now, our hemp and CBD assets are really what we’re thinking about from a listing sort of standpoint on the NASDAQ or, you know, other US Exchange.

Ben Smith:    Okay, terrific. Well, great inaugural introduction to your company, and your visit on Midas Letter. It’s a story we’ll be watching for sure. Thank you so much, Smoke, for coming on air.

Smoke Wallin: Thanks for having me. Have a happy holiday.

Ben Smith:    You as well.

 

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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