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One of the most interesting plays in the cannabis space right now is Sugarmade Inc (OTCMKTS:SGMD), a cannabis player that operates now mostly through its stake in the BudCars cannabis delivery business, a leading California mobile delivery-based dispensary business that has seen massive growth on strong margins so far this year, but still trades at under a penny per share.

The company has reported stunning topline and bottom-line growth so far in 2020 and has also discussed a strong expansion plan underway that will see it move beyond the northern California market and into the LA metro area, which is widely recognized as perhaps the largest metropolitan cannabis market in the world at present.

That would be a huge move. However, the company hadn’t provided a ton of clarity on the precise nature of its expansion process, which was initially slated to feature an LA BudCars launch in July. To resolve this, the company put out an 8K this week outlining the process underway, where things stand now, and why we didn’t see LA BudCars officially launch in the past month.

While skeptics and SGMD shorts have sounded an alarm, the formal 8K disclosure grants some much-needed transparency, and it turns out that reality is actually quite positive for the stock – SGMD has pushed about 30% higher this week as well.

The Details

In the 8K, Sugarmade dealt with what is probably the most important and most contentious question for shareholders of SGMD stock: “Earlier this year, BudCars, in which Sugarmade has invested, announced an expansion into the Los Angeles area. What is the status of the launch of delivery services in the Los Angeles area? And, what is the status of the second delivery operation in the Los Angeles area?”

The response to this question is straightforward and suggests no attempt at evasion from the company:

“One of the Los Angeles sites is behind schedule and the other is well ahead of schedule. We still expect both to become operational as soon as final issues are resolved.

“We, and the BudCars staff, are very excited about the Los Angeles expansions. We are actually expanding not into just a single LA location, but into two. The first of these expansions was expected to go online during July and significant progress toward opening has taken place. Unfortunately, we are getting delayed due to last-minute regulatory issues. For example, we are still working to get the security plan approved by local authorities and we have a few minor issues relative to facilities build-out concerning the Americans with Disabilities Act (ADA). As soon as these final issues are cleared, we plan to begin operations.

“On the positive side, we are ahead of schedule at the other Los Angeles site. We are happy to report the turn-up of this second site could occur sooner than was expected. While the California regulatory environment is difficult to navigate and there could be further delays. We are now envisioning both sites to be operational at the end of August. Of course, we see major business opportunities out of both sites once operations begin. We will be sure to keep everyone updated. We are working hard daily on both sites.”

The Big Picture

As noted above, it turns out that the company is in fact in the midst of an expansion into the LA area for its BudCars business. As with any new location in a major metropolitan area, there are countless regulatory hurdles that promise uncertainty and an unpredictable path forward. How much time will it take for the local officials to attend to something like the approval of an installed ramp as ADA accessibility approved? Will it be Thursday, or a week from Thursday? Later?

These factors are taken in stride for a private company. But for a publicly traded company with a rapidly growing business making a major move to expand geographically, any attempt at specifying a date is going to be taken as a commitment in stone despite involving so many factors over which the company may not have any control. You outline a plan. You move forward with that plan. You communicate that plan to your shareholders. And then you communicate about any speed bumps encountered along the way.

At this point, we have a clear sense that, not only is the first LA location on track and simply awaiting some factors no doubt slowed by the pandemic – city council isn’t exactly on vacation right now. Crisis mode is the standard setting for most administrative affairs in local government around the country right now.

However, the other key piece here is that the second LA BudCars location is ahead of schedule. That’s perhaps even more important here.

One gets the feeling that there are certain factors here that have been backed up, but the company has pushed forward with everything it has control over. And eventually, the dam will break and the licenses and permits and approvals will flow out of City Hall and move everyone forward. At that point, Sugarmade Inc (OTCMKTS:SGMD) may be ready to launch both of its new LA BudCars hubs in coming weeks.

What Does it all Mean?

The big point we take from this information, when put in the context of the Company’s other communications, is that the strategic factor in the SGMD growth equation is going to define the second half of the year.

In recent months, we have seen remarkable organic growth. This quote from Jimmy Chan, SGMD CEO, from the company’s June performance release, sums it up well:

“June was another breakout month for BudCars growth across basically every single metric important to gauging our progress. Our pricing improved. Our average order improved. We did more business with more people and booked a significant jump in gross profits while holding our 47% gross margin level as volume increased. We look forward to continued breakout growth in July.”

The pace of growth at its Sacramento hub suggested that each LA hub could turn in over $20 million in annualized sales after they launch. That suggests August will be a month of continued organic growth up north, but also a month of anticipation for a major boost in total sales starting in September and through the calendar Q4 period.

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