While the world of mergers and acquisitions (M&A) has typically been the realm of the largest of companies backed with Wall Street capital and this has also been true relative to the emerging cannabis sector, one mid-tier market participant is shaking off this dynamic and could be poised to be one of the industry’s most active M&A players. Led by cannabis industry maverick, Jimmy Chan, Los Angeles-based Sugarmade, Inc. (OTCQB:SGMD) is positioned to quickly become one of the cannabis industry’s fastest growing suppliers to the industry.
Growth rates for cannabis companies are being significantly boosted through innovative acquisitions by not only the larger premier industry participants, but also by several mid-tier players. Over the past year, major cannabis companies such as Aurora Cannabis have produced eye-popping prosperity via internal growth, and also through acquiring some of the smaller players in the booming industry. Fellow Canadian company, Canopy Growth, Inc. has also joined the acquisition bandwagon with its own set of roll-up companies and technologies. Aphria, Inc. has entered the cannabis acquisition game with its proposed acquisitions in Latin America and Jamaica worth around $200 million. The number of deals has continued to expand and there seems to be no let up in sight relative to this cannabis mergers and acquisitions boom.
While a lot of the high-profile activities have been with the very large companies, the acquisition angle is not just for the industry behemoths. Several strong mid-tier players have also entered the fray. Sugarmade, Inc., for example, is one of these companies. You can find them on the OTCQB market with the symbol SGMD. They’re another group to keep your eye on, as they’re just now starting to make moves.
Sugarmade (OTCQB:SGMD) recently took the dive toward aggressive mergers and acquisitions with important announcements last week. Per a statement, they’re seeking to acquire at least four companies that supply the picks and shovels to the cannabis industry. Sugarmade, a supplier of hydroponic growth supplies, has proven to be a fast growing, successful company. As of recently, its revenue growth projections for next year boosted to $30 million, representing a growth rate of over 700%. The two firm proposals Sugarmade recently outlined in a Securities and Exchange Commission filing point to even faster growth for this “non-plant touching” supplier; as the two targets are already producing more than $45 million annually. Additionally, the company indicated it’s in talks with two additional businesses for acquisition, which is expected to produce an additional $50 million in revenue.
The overall revenue boost to Sugarmade could be significant. Revenues from the first two companies could boost the company’s guidance to over $75 million for 2019. And, if Sugarmade is successful in acquiring the additional businesses, revenue guidance could top a staggering $125 million for 2019. This level of growth would likely make Sugarmade one of the cannabis industry’s fastest growing companies and one of the largest publicly traded supply companies.
The first acquisition target is a Southern California-based supplier of hydroponic cultivation supplies. They provide equipment to the wholesale sector and large commercial cultivators. This is a very important market because the trend in cultivation is very much toward the large commercial operations. Sugarmade’s proposal is to acquire all of the outstanding capital stock and business operations for a combination of cash and common shares of Sugarmade. The target company is believed to be one of the larger operators in this sector, with revenues of approximately $40 million per year. To note, this company is also profitable and cash flow positive. Should the company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade corporate umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
The second acquisition target is a Washington state-based supplier, which is primarily a retailer of hydroponic cultivation supplies. Sugarmade’s proposal is to acquire all of the outstanding capital stock and business operations for a combination of cash and common shares of Sugarmade. The target is producing revenues of approximately $5 million per year. Should the company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade’s corporate umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
“These acquisitions will not only significantly boost our top line revenue growth, but will also expand our distribution across the most important sectors of the fast-growing cannabis marketplace,” says Jimmy Chan, CEO of Sugarmade. “This includes the wholesale market, which services brick and mortar retailers and to large commercial cultivation operations, which are rapidly expanding their cultivation footprints.”
“In addition to the revenue growth opportunities, we will also be afforded very meaningful cost savings across many operational functions,” Chan says. “In particular, we believe there are strong cost synergies relative to manufacturing, purchasing, international transport, warehousing, and shipment to customers. Perhaps most exciting, however, is that these acquisitions will place us among the largest public companies in the booming cannabis sector.”
While Sugarmade has been a pretty small company that’s enjoyed Wall Street research analyst coverage, an analyst research group recently took notice of the company’s impressive growth trajectory. SeeThruEquity analyst, Ajay Tandon, initiated coverage on Sugarmade last month and has placed a price target on the company’s common shares at $0.30, which represents a potential upside of well over 100% from recent prices. In the report, the firm outlines expectations for the market in the 29 US states where cannabis regulations and laws are relaxed. The research analyst also commented that the outlook for Sugarmade is impressive with its targeted markets expected to grow from $9.2 billion in 2017 to $47.3 billion by 2027.
There seems to be no letup in sight for cannabis-related mergers and acquisitions activity. According to Viridian Capital Advisors, a New York firm that tracks investment activity across the cannabis sector in the United States and Canada, during the first half of 2018, there were 145 mergers and acquisitions, which is up by more than 100% on a year over year basis.
Harrison Phillips, Viridian’s Vice President, seems to be expecting continued growth on activity. “The U.S. is still relatively untapped,” he says.”We’re far from the scale and magnitude that this industry could be operating at. We expect that there’s going to be significantly more capital coming into this space.”
Industry participants and investors will be watching closely for the future actions of companies such as Sugarmade, Inc. (OTCQB:SGMD) as the inevitable industry consolidation continues.