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Sugarmade Inc (OTCMKTS:SGMD): Verticalization and What it Means

Sugarmade Inc (OTCMKTS:SGMD) shares have been on fire in recent weeks. The main story here – in case the name is new to you – is the company’s BudCars division, which is quickly becoming a leader in the California cannabis delivery market. The catalyst for recent strength in the stock appears to be some combination of strong BudCars growth data from its Sacramento hub, the company’s progress toward opening a new BudCars hub in the LA regional market, and recent movement by Sugarmade to verticalize the BudCars supply chain by establishing new cultivation and manufacturing operations.

It is this last point we wish to explore here, because it may actually be the most important of the three looking ahead.

In the cannabis market, the ability to verticalize a supply chain – for a distributor or retailer – could be worth as much as 25% added to gross margins if the fixed cost process is manageable. But there’s another key advantage: cannabis retailers have direct access to end-market consumers. That creates a much faster path to establishing traction with the development of branded products because market penetration doesn’t take the participation of distributors who already have established interests in supporting other brands they sell.

In other words, provided the fixed costs can be managed, verticalizing can have an enormous payoff.

According to recent communications by SGMD management, this appears to be the path the company is on right now. This is signaled by both increasing attention to communicating the bottom-line story and by the company’s announcement that has already secured a 6k sq ft greenhouse for cultivation.

 

The Bottom Line

One clear-cut move that makes sense from Sugarmade Inc (OTCMKTS:SGMD) in its recent releases is to focus on its gross profit growth and the wide gross margins the company is already seeing in its sales activity.

This focus suggests a company ready to verticalize at least some portion of its supply chain in the months ahead because it is acknowledging the importance of gross margins in the model. This should be seen as a very good sign by Sugarmade investors. This emphasis in communications started a couple weeks ago and likely has a lot to do with the stock’s stunning rise in that time.

For example, look at this quote from Sugarmade CEO, Jimmy Chan, in its June 4 press release:

“The top-line growth data has been extremely strong, and we have no reason to expect that to change. But it’s important that our shareholders understand that this is not a delivery service model. We aren’t simply earning a fee to deliver someone else’s inventory, and barely breaking even in the process. We are building an inventory at wholesale pricing, marking it up significantly, and pulling in very strong margins on every unit we deliver for sale.”

SGMD shares moved up by as much as 350% over the two weeks following that comment.

On June 16, Sugarmade announced “record growth in gross profits and gross profit margins for BudCars sales during the month of May (up 46% on a sequential month-over-month basis), and continued strong signals so far during the first half of June, with gross profits growing 9.9% on a week-over-week basis.”

Chan highlighted this bottom-line theme in that release as well:

“As we gear up to open our first new hub in the Los Angeles regional market, we continue to see very good signs from our Sacramento hub, with the very rapid topline growth clearly translating to the bottom line as margins hold up and even improve. As we recently reiterated, BudCars is not a delivery business comparable to GrubHub or Uber Eats. It is a top cannabis retail business with very consistent 46-52% gross margins on a wholesale inventory with very secure logistical underpinnings. This differentiation has been a source of misunderstanding, and it is critical to fully appreciating our value proposition and our strategy as a Company moving forward.”

SGMD shares more than doubled in the 6 days following that release.

 

Cultivation

Of course, the real kicker to this story is the company’s recent announcement stating that it has already applied to the California Bureau of Cannabis Control to “expand into cannabis cultivation as part of a strategic plan to partially verticalize its BudCars model.”

To that end, the company has already secured a property containing a 5,000 square-foot indoor premium cannabis cultivation facility located in very close proximity to its Sacramento BudCars hub. Management for SGMD went on to note that this facility would be outfitted with as many as 250 high-quality LED lights, suggesting production potential for as much as 250 lbs of premium dried cannabis flower per month.

If you do the math, that could produce a stream of cannabis supply worth as much as $1.6 million in additional sales per month for Sugarmade shareholders to celebrate. And, as noted above, even more of that cash coming in the door would flow to the bottom line given that it would represent an in-house supply coming into the BudCars system at a much better cost basis than by paying someone else for their weed and their mark-up for doing business.

This is the path to growing profitability. And it makes sense given Sugarmade’s rapid growth and its path to establishing itself as a real player in the cannabis delivery market in California.

 

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