CFO John Philpott: ‘In The Right Place At The Right Time’

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In the midst of a shut-down economy, Vertical Wellness found a new revenue stream, which paved the way for a huge round of financing—and likely, an IPO.

After a setback that resulted in a round of layoffs late last year, Vertical Wellness is now bringing those employees back and is on track to start offering innovative hemp-derived cannabinoid (CBD) solutions, while also continuing to process hemp for others in the now legalized industry, says CFO John Philpott.

With its tweaked model, the Los Angeles-based company was also able to raise $4.2 million, and is now moving closer to an IPO. We talked with Philpott to learn how he managed to turn things around with a little bit of luck and a lot of fast action.

How did you navigate the bumps in the road last year?

For us, layoffs and reduction of staff hours was a by-product of limited financing for CBD products due to lack of clarity from the FDA allowing ingestibles — even after the 2018 Farm Bill legalized the sale of hemp with less than 0.3 percent of THC content. It was a setback we faced in the fall of last year, and we ended up ultimately not being able to push our planned IPO through.

So we decided to pull back operations and regroup a little bit. During this time, we lucked out when another group asked if we could dry their hemp in our Kentucky extraction facility in order to preserve it for future processing. So we happened to be in the right place at the right time — very few companies can dry 240,000 pounds of wet hemp mass a week. They came to us initially with 3 million pounds, and then subsequently increased that several times to a total of 18 million pounds.

After getting this contract, we invested in two additional pieces of equipment to expand our capacity up to 750,000 pounds a week. We decided to grow the supply chain part of our business because of the cash flow it can generate.

After securing this large contract, we were able to go back to our investors and raise $4.2 million. The investor group is mainly friends and family and existing shareholders of the cannabis company that spun us out in May 2019 after raising $65 million from these shareholders — of which $24 million was provided in the form of debt and equity as part of the spinoff. So when we spun out, we already had some 200 shareholders that we were able to go back to for an additional preferred stock raise. This enabled us to focus not only on growing our supply side of the business, but also on preparing for our consumer brand launch.

What has changed in the regulatory world that enables you to do that?

The FDA has not recommended selling ingestible type products, but there are other form factors such as creams, lotions, patches and oils that are not considered ingestibles. There are plenty of market opportunities for non-ingestible consumer products, especially since our launch will start out small and grow over time. Additionally, there are many companies selling all form factors online which we are also considering doing.

What are the company’s plans for your consumer CBD brands?

Our goal is to primarily be a consumer brand company with reliable sources of CBD and hemp products. In order to make that work, we needed to be able to have control over the entire supply chain process. To that end, we acquired the Kentucky operations and built out the drying extraction process and engaged some local farmers who grew hemp for us.

In addition to our drying services business, we still have our own dried hemp in storage, so we now need to get back into the business of extracting and converting dry biomass to various forms of CBD oil or isolate that can be used in our and other companies’ consumer products.

We just launched a test of six direct-to-consumer products — Taos, Lap Dog, Par5, Halogenix, Wingra Farms and Hemp-Moji — with other brands to be launched later, including Kathy Ireland-branded CBD products.

We will put a link to Shopify on our website to enable customers to buy our products. We’ve tested the shipping logistics from our Kentucky operations, and we’ve tested the credit card payment process, and now we’re creating the final strategy for an expected launch later in November.

How does your role at Vertical Wellness compare with your previous CFO roles at other companies?

I was brought on last year after the spinoff from the cannabis company. My background is in taking companies through IPOs, reverse mergers and bringing small companies up to speed so they can become public, which includes handling the SEC, investor relations and public relations processes. I’ve done this a number of times so I am prepared to do it again with Vertical Wellness.

My CFO role differs depending on the nature and stage of the company, so it’s very different in the start-up world than in a multi-billion dollar company. For example, I am much more concerned about managing cash and expenses for small companies that don’t always have a good source of cash or guarantees of cash flow.

In the CBD world, we presently can’t use traditional debt financing for working capital or asset-based lending until banks get more comfortable and develop commensurate compliance programs. So we have to rely on cash flow from revenues or those revenue streams to finance against. Fortunately, lately our revenues from our services business have been really strong and the consumer brand launch will give us more ongoing revenues. We are also hoping to use some other assets, such as our consumer products inventory or accounts receivables, to obtain asset-based loans from lenders or banks that work with CBD companies.

How would you describe your relationship with CEO Smoke Wallin?

I think we are very complementary – in my role I’m conservative, holding tight reins on cash so we won’t run out of money, while his role is to bring in relationships and to oversee and drive the vision. Fortunately, he has a good understanding of accounting and finances, which I appreciate because I don’t have to spend a lot of time explaining things to him. I also bring a lot of value with my expertise in helping companies go public, including deal structure and public disclosure limitations, thus I consider ourselves very synergistic.

Anything else you would like to add?

I had no idea how difficult it would be access the traditional services world — payroll processors, auditors, commercial banks, credit processors, insurance companies — due to the perception of legalized hemp-derived CBD products and how uninformed or lack of risk-taking these service providers are. They really think that cannabis and legalized hemp-derived CBD products are the same thing.

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