Vertically-integrated hemp / CBD player; Sweet Earth Holdings, debuts on CSE

One could hardly time a better entrance to the CBD / hemp / cannabis & related space than Sweet Earth Holdings Corp.’s (CSE: SE) trading debut on May 26th. Late last week, researchers from Canada’s University of Lethbridge found that CBD might help prevent contracting COVID-19, and possibly treat its symptoms. Early indications suggest that CBD could be used in mouthwashes, throat gargle products & inhalers.

Make no mistake, these findings are far from definitive. Considerably more study (time + money) will be required. Yet, share price reactions were indicative of the potential upside for CBD / hemp stocks in coming months. For example, CBD industry giant Charlotte’s Web’s stock, (TSX: CWEB), rose 24% on a single, and is up 62% from its low of May. {NOTE: With 79M shares outstanding, the market cap = C$12M, shares have traded between C$0.15 & C$0.40}.

Other CBD / hemp focused stocks are up even more. CV Sciences (OTC: CVSI) is up +154%, Isodiol (CSE: ISOL) +122%, cbdMD (OTC: YCBD) +106%, Medical Marijuana (OTC: MJNA) +90%. While many readers have heard of CWEB, some are no doubt wondering about the others. Never heard of them? You’re not alone.

Surprisingly, only about 1 in 9 of the ~300 hemp / CBD / cannabis & related names I track are primarily hemp or CBD-focused. The dozens of Canadian LPs & U.S. Multi-State Operators (“MSOs“) are almost entirely cannabis-focused. This suggests to me that well managed, vertically integrated hemp / CBD companies could meaningfully outperform cannabis-focused peers.

Think about it, just 11.11% of stocks are hemp / CBD focused, yet well more than 11.11% of the market opportunity in the overall hemp / CBD / Cannabis & related sector is from companies like Charlotte’s Web & Sweet Earth. {see corporate presentation}

In the following interview, I asked founders Sam Nastat, Farinaz Wadia & CEO Peter Espig for an overview of their exciting new story.

During the past several years, Sam Nastat has been actively involved in the funding &  operations of cannabis related businesses. During this time, Sam has created valuable relationships with growers, processors & distributors throughout the U.S. & Europe. His detailed agricultural knowledge, plus keen capital market background, gives Sam a truly unique perspective on this sector.

Farinaz Wadia is a co-founder of Forcefield, based in Oregon. Forcefield is a leader in the design / build of technologically advanced greenhouses. Forcefield acts as exclusive agent for Danish based DACS A/S and the MagFan line of exhaust fans. Farinaz has the managerial skills needed to handle expansion plans for Sweet  Earth, and the creativity to help Sweet Earth thrive.

Peter Espig has structured over US$2.0 billion in private equity & pre-IPO investment transactions. The former Goldman Sachs & Olympus Capital executive is a pioneer in special acquisition companies (SPACs) and is a highly experienced turnaround expert in multiple sectors, on an international scale. He received his B.A. from the University of British Columbia and an MBA from Columbia Business School.

Sam, your corporate presentation says, “Sweet Earth has been years in the making…” Please describe your corporate history.

Co-founder Sam Nastat: Our company started out in the famous Applegate Valley of Oregon as a stand-alone, all encompassing hemp operation. We are not an industrial hemp grower / processor. Our intention from the beginning was, and still is, to be a meaningful producer, but with the feel and care of a small, niche-market farm stand.

Please tell readers about being awarded “BEST CBD PRODUCTS” at the 2019 Global MJBiz Conference. How significant an honor is it? 

Co-founder Farinaz Wadia: To be chosen from among 1,312 exhibitors at the world’s largest cannabis show, is a huge honor. It validated our corporate identity and product lines. To win, “best CBD products” out of 111 hemp / CBD exhibitors in our first year of attendance, is a noteworthy milestone.

The products, our story, team and booth, all assisted in getting our message across to the 1,000’s of people that visited with us at the conference.

The CBD space is very competitive. How can readers be sure that Sweet Earth is pursuing the right products, brands & jurisdictions?

CEO Peter Espig: Correct, it is competitive. But I ask you, is there any rapid-growth, strong-margined, globally significant industry that is not highly competitive? Regarding the right products & brands, we recognize that some products will be hits and others not so much,,,. This is the consequence of being cutting-edge creative. It’s more important to understand the benefits of strong partners within targeted jurisdictions, than to try to go it alone.

Sweet Earth has the mentality to succeed globally. We need to think and be, “globally local” which is achieved through our local relationships that provide local insight in every global market we enter. The company has various affiliations, but our brand “Sweet Earth” and the concept of ethical, organic, high-quality merchandise resonates globally.

How can a company of your modest size afford to be in so many places, doing so many things, all at once?

Peter Espig: Good question. This can only be accomplished with trusted relationships. Our key legal advisor is based in Europe, we have a board member based in South America, we have a team in the U.S. that understands that market. The U.S. is still, by far, the largest hemp & cannabis market in the world.

Sam Nastat: In Spain we have made an investment in getting a farm up and going this year. Until we have a reliable supply of the materials that we will harvest from this farm, Sweet Earth will export its line from the U.S. to Spain and into Europe. Sweet Earth has a distributor in place to assist with the marketing & distribution so that we will have shelf space & brand awareness until our harvest.

In Panama we have a major retailer that will distribute our products, products we will export from the U.S. Once laws have been ratified in Panama for the growing and processing go hemp/CBD we will then enter into a lease for farmland that we have identified.

Sweet Earth Hand & Body Sanitizers kill the COVID-19 virus. Does management expect meaningful sales of these sanitizers?

Farinaz Wadia: Yes, we have just begun offering a high-end sanitizer that contains moisturizing qualities. These sanitizers are beginning to get noticed by chain retailers, some of which we have begun to supply.

Is Sweet Earth a cultivator? An extractor? A brand developer? A distributor?

Peter Espig: Sweet Earth is in fact doing all four. We are a cultivator in all aspects of our growing, seed breeding, sowing & harvesting. We do not outsource those tasks. Sweet Earth has developed its own unique harvester to be able to substantially reduce harvesting labor costs. We have a building being constructed that will house the extraction equipment we purchased and the personnel to operate it.

Once construction & permitting is completed we will begin that phase for Sweet Earth and for other growers. A testament to our brand development was the award given to us at the MJ Biz Show for best CBD product line. We are on several retail platforms that have garnered us retail clients that we directly distribute to.

As a cultivator we assure quality control and the ability to obtain scarce ingredients. Internal extraction lowers the cost of production, provides quality control and a potential revenue stream. We are not a distributor, other than for our own brands and white label for others. 

White labeling gives us experience in new products (especially when white labeling for larger entities). We recognize that on certain consumer products we lack expertise; white labeling provides us the opportunity to gain expertise and enter new markets / jurisdictions.

Sweet Earth points to having 2,500 hemp plants/acre compared to peers at 1,500/acre, and up to 15% more yield per plant. How is this accomplished? 

Sam Nastat: Our strain was developed by our in-house genetics team. Our process of feeding along with soil amendments and a unique strain, give us advantages that other recently converted commercial farms don’t have.

Your CBD cultivation activities are fairly significant, but not that large. For outdoor crops, aren’t economies of scale very important?

Peter Espig: Sweet Earth is not an industrial grower of hemp / CBD. Still, our corporate reach gives us a large enough footprint for the activities that we are pursuing. For our operations, economies of scale are not necessarily advantageous. In fact, large scale creates a different platform.

Cannabis growers learned that the hard way. Growing operations of excessive size created significant quality control issues. Millions of dollars of hemp crops across North America had to be destroyed due to elevated THC levels.

Larger hemp operations typically focus on the production of biomass, not flower. We have modern machinery for harvesting, getting too large would force us to focus on the lower-end, highly competitive biomass segment, which does benefit from economies of scale.

Many companies are starting to talk about CBG & CBN. Where is Sweet Earth on this front?

Sam Nastat: Sweet Earth has begun to explore that avenue, and some of the acreage in our 2020 growing cycle will include those strains that have shown promising CBG / CBN yields. While many companies are talking about CBG & CBN, not all have the experience and a dedicated genetics team like we do.

To what extent is purchasing CBD products a luxury item vs. a necessity? 

Peter Espig: We are witnessing a paradigm shift in consumer consumption. There’s a big difference between, “luxury item” and “superior quality item.” Our products are high quality, but also within the price range of most consumers. Online sales of products have performed very well. We need to emphasize traffic to our site and a user-friendly online shopping experience.

Typically, during hard economic times, high-price fashion brands suffer the most. However, consumers still like to shop and enjoy the experience of receiving an exclusive product at an affordable price. We need to instill this into the consumer.

COVID-19 has already had a tremendous impact on business activity. Given this uncertainty, how is Sweet Earth planning for the rest of 2020?

Peter Espig: Yes, it has impacted us. The reality is that sales of biomass & flower have been negatively impacted. On a positive note, new supply is, and will be, greatly diminished. Sales of sanitizer products have performed well, but other products have suffered.

Thank you Sam, Farinaz and Peter for your time and thoughtful responses to my questions. I wish you the best of luck and will circle back in June. {see corporate presentation}

DisclosuresThe content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER](together, [ER]) about Sweet Earth Holdings, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Sweet Earth Holdings are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Sweet Earth Holdings was an advertiser on [ER] and Peter Epstein owned shares in the Company. 

Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.