CannabisNewsWire Editorial Coverage: A growing market is supporting a wave of acquisitions and cross-company investments in the cannabis industry.

  • Significant growth in the cannabis industry is supporting a range of multimillion-dollar investments.
  • Some of these have taken the form of acquisitions, as innovators evolve into established companies.
  • Others are cross-company investments, some within the sector and some from outside.
  • Profits are coming not just from cannabis itself but from support services, with companies profiting from pick-and-shovel plays.

One of the companies making a pick-and-shovel play is Sugarmade, Inc. (OTCQB: SGMD) (SGMD Profile), which is expanding its position in cultivation supplies through acquisitions and marketing agreements. GW Pharmaceuticals Plc (NASDAQ: GWPH) recently carried out a public offering to fund further growth, raising $345 million to expand its cannabis-oriented pharmaceuticals work. AbbVie, Inc. (NYSE: ABBV), on the other hand, has retained only a limited connection to cannabis, moving instead into other treatments. Specialist consulting company MariMed, Inc. (OTCQB: MRMD) provides advice for those looking to expand in the sector, covering the development and management of cultivation facilities, and recently investing in a related software company. For Medmen Enterprises, Inc. (OTCQX: MMNFF) (CSE: MMEN), expansion means a vertically integrated supply chain across four US states as it expands a carefully developed brand.

Cannabis Acquisitions Continue as Companies Seek Liquidity

With the completion of cannabis legalization in Canada, investors are watching closely to see what effect this will have on the market. Over less than 20 years, cannabis has evolved from nothing into a multimillion-dollar industry, with companies ranging from cultivators and retailers to payment specialists and equipment suppliers. As it continues to expand at a rapid rate in both Canada and the US, the market is seeing growth for players both big and small.

To fuel this development, many companies are looking for fresh finance. Liquidity is needed to fund research, development, and expansion, from building larger cultivation facilities to setting up new retail outlets. This is both driven by and driving a wave of new finance deals and acquisitions, as the sector matures and consolidates its resources.

Acquiring the Fundamentals

The appeal of acquisitions is driving the strategy of companies such as hydroponics supplier Sugarmade, Inc. (OTCQB: SGMD). Hydroponic equipment is essential to the indoor cultivation of cannabis, so the growth of the sector promises a boom in demand for hydroponics. Sugarmade is using this boom to attract additional finance and undertake a raft of acquisitions, with an end goal of becoming a major player not just in hydroponics but in the cannabis space itself.

Such acquisitions have taken off in a big way over the past year. The first half of 2018 saw 145 mergers and acquisitions in the cannabis sector, nearly double the number for the same period in 2017. Some of these represent consolidation by existing cannabis players, as they mature from innovative startups into established businesses in a widely accepted field. But money is also coming in from the outside, for example through Constellation Brands’ acquisition of a large portion of Canopy Growth.

A pattern is emerging of cannabis-adjacent companies moving directly into the sector. For a company such as Constellation, the move is a sideways one from investment in alcohol to one in cannabis, protecting its place in the recreational consumables market. It’s the same play that other alcohol and tobacco companies are eyeing. For Sugarmade, acquisitions represent expansion within its existing business, ensuring a firm hold on hydroponics, as well as a move up and down the supply chain to better profit from the businesses it is already tied to.

A Pick-and-Shovel Strategy

Earlier this year, Sugarmade announced that it was moving to acquire two other suppliers of cultivation equipment. Now details of those deals are emerging, with the signing of a binding Letter of Intent ("LOI") to acquire Sky Unlimited, LLC. This could allow Sugarmade to expand its distribution channels, thanks to the different models followed by the two companies. While Sugarmade’s sales to the cannabis sector primarily come through online buyers, Sky Unlimited specializes in selling to wholesalers and large commercial cultivators. Combining the two may create manufacturing, logistical, and marketing efficiencies across an expanded customer base.

"The trend in cannabis cultivation is toward the larger commercial cultivation operations, and Sky Unlimited is in the thick of that dynamic marketplace," said Jimmy Chan, CEO of Sugarmade. "This year, Sky Unlimited and its associated operations are expected to produce in excess of $40 million in revenues with profitability and positive cash flow. This new revenue stream combined with our recently upwardly guided revenue forecast of $30 million for next year will make Sugarmade one of the largest publicly traded suppliers to the booming cannabis cultivation marketplace, with a combined revenue forecast for next year in excess of $70 million."

The types of company being targeted by Sugarmade reveal a pick-and-shovel strategy. Rather than making a direct jump into cannabis, the company is investing in the underlying products and services cannabis suppliers need. It’s a more conservative move than investing directly in cannabis, one that will buffer Sugarmade against the immediate effects of a fast-changing and still controversial sector, while letting it profit from the sector’s growth.

Following a previous Master Marketing Agreement with BizRight, this latest move makes Sugarmade one of the largest publicly traded cannabis supply companies. The company shows no sign of stopping there, having announced its intention to continue with an expansion strategy. The next likely move may well be brand acquisition, providing a higher price-to-earnings ratio for investors. Having already made an acquisition proposal for a Washington state retailer with $5 million in annual revenues, Sugarmade is on its way to becoming a more public fixture in the cannabis market.

Financing Growth in Cannabis

As in any sector, the success of expansion strategies will depend upon their liquidity. Fortunately, the state of the cannabis market appears to currently ensure a steady stream of finance. The US cannabis market alone is expected to be worth $10 billion in 2018, 50 percent more than it was only two years ago. Canada’s market is also expected to be worth billions, as legalization transfers the recreational consumer base from illegal dealers to legitimate businesses.

Cannabis companies are using this opportunity to channel finance into growth. Some are striking deals for bank loans in newly legalized regions, while others are using public offerings to raise fresh finance through sales of shares.

Sugarmade is taking a different approach, using expansion to fund further expansion. Following the BizRight and Sky Unlimited deals, the company has upgraded its projections for revenue in 2019 from $6 million to $70 million. Its previous deals will now provide the liquidity for future acquisitions, allowing a rolling strategy of expansion across the sector.

The pick-and-shovel plays look to pay off.

Cannabis Companies Making Big Moves

As the market keeps growing, so do many of the companies working in cannabis.

GW Pharmaceuticals Plc (NASDAQ: GWPH) is a world leader in the development of cannabis-related medicines, thanks to its strong research program and manufacturing expertise. Already a major player in the sector, the company has recently sought funds for expansion through a public offering. The result was an extra $345 million in funds, reflecting investors’ faith in the cannabis sector and in the future of companies such as GW. These funding will allow the company to keep growing its research and production work, with that research work expanding its portfolio of cannabis-related intellectual property.

While some companies invest more heavily in cannabis, others are diversifying. Pharmaceuticals manufacturer AbbVie, Inc. (NYSE: ABBV) is the company behind Marinol, a drug used to tackle appetite loss due to AIDS and cancer treatments. But while Marinol’s active ingredient is chemically identical to THC, the best-known active ingredient in cannabis, the company has filed only a handful of patents relating to cannabis and shows no sign of expansion into the sector. It’s a move that may help AbbVie in marketing to cannabis’s opponents, but one that leaves the space open for competitors.

The expansion of cannabis companies has supported the emergence of specialist support services, such as those provided by MariMed, Inc. (OTCQB: MRMD). A cannabis consulting firm, MariMed provides professional guidance on the development, funding, and operation of cultivation facilities. This can help other firms navigate the complicated issues surrounding the industry, covering everything from real estate to regulatory compliance. The company recently invested in Sprout, a software company supporting cannabis brands and dispensaries, allowing it to bundle software with its other business solutions.

Medmen Enterprises, Inc. (OTCQX: MMNFF) (CSE: MMEN), has used expansion to develop a vertically integrated supply chain. The company works in both cultivation and retail, meaning that it handles the product all the way from planting first seedlings to placing packaged cannabis into customers’ hands. Its recent acquisition of dispensary and cultivation facilities from Treadwell Simpson Partnership means that it is spreading its carefully managed brand from existing bases in California, Nevada, and New York into Florida.

The growth of the cannabis market is providing a flow of finance, leading to acquisitions and cross-company investments across the sector.

For more information on Sugarmade, visit Sugarmade, Inc. (OTCQB: SGMD)

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