An Insider’s Perspective: Challenges, Growth Plans, and Insight from a Multistate Operator

As the cannabis industry continues to grow across the US and globally, so too are multistate operators (MSOs). MSO’s are a sign that the cannabis industry is here to stay as investments and infrastructure for big players continue to come online. However, these larger companies face many challenges in setting up shop, often dealing with banking issues and the various state-by-state legal frameworks. Frank Knuettel, CEO of Terra Tech Corp. (now Unrivaled Brands Inc.), recently spoke with us about the various challenges his company faces, their plans to expand into the largest West Coast MSO, and more.

Can you tell us about your company, Terra Tech Corp. and the recent merger with Unrivaled?

Frank Knuettel: Terra Tech is an 11-year-old company that we believe was the first US plant-touching company that was listed on the US Stock Exchange. We have been publicly listed on the over-the-counter (OTC) Markets Group since 2012. We recently merged with Unrivaled, and pursuant to that, we rebranded the company as Unrivaled Brands Inc., with the intent of building the largest West Coast-based multistate operator (MSO). Currently, we have operations in California, Oregon, and Nevada, across all types of cannabis assets, whether it be cultivation, distribution, brands, delivery, or dispensaries. So, we are a vertically integrated West Coast-based cannabis MSO.

What is your vision for the future as the rebranded company Unrivaled Brands Inc.?

Knuettel: I think we have a lot of great opportunities. The California, Oregon, and Nevada markets are in and of themselves approximately 30% of the national market, so we have an opportunity now to build a large, deep West Coast-based cannabis MSO. And I say opportunity now, but there are protective moats against the industry who are protecting the industry with the federal illegality. And to the same extent, there are protective moats around, especially California and Oregon, in that a lot of the large MSOs have tended to focus more on the limited licensed Midwest and East Coast states and have a small or nonexistent footprint in the California and Oregon markets at this time. So, we can use our platform and our asset base to really create a large enterprise and some of the largest cannabis markets in the country.

What challenges to do you face as a multi-state operator? How do the different state regulations impact your business?

Knuettel: Well, that is a pretty significant question, in that, at the moment, we have federal illegality and fairly different regulatory regimes, depending on the states in which we or any cannabis company operate. So, we're basically creating individual subsidiaries in various states because the state regulatory environments each have fairly different operating processes. On top of that, because of the federal illegality, we also have significant headwinds with respect to commercial banking, insurance, and other things.

I would say commercial banking is probably the most complicating factor of our business and the lack of access to mainstream banks, cash management, credit cards, and that sort of thing. So, there's quite a few headwinds. But, frankly, it’s the headwinds that everyone in the industry experiences and it’s part of what gives us the opportunity and runway to create a larger competitive operating enterprise right now.

In your various cultivation sites, do you follow individual state guidelines, or do you implement the most stringent rules from one given state to all your locations? For example, California might require more testing for pesticides than say Nevada does.

Knuettel: Yes, we strictly comply with all the regulatory requirements in a state in which we operate in. We do our best where possible to facilitate a standard process across all our operations—and that facilitates just a greater level of efficiency with respect to our operating team and our cultivation team. It allows them to move, from state to state, a little more easily and that we have a common process. So, we try to sort of raise, across the company, our processes and procedures to the stricter markets in which we operate, so we have that common platform.

Can you tell us a little bit about the manufacturing and processing operations? What is a typical turn-around to create products? How does automation fit in?

Knuettel: The turnaround time varies depending upon the type of product. For example, flower, packaged flower, or pre-rolls are manufactured in-house because of the importance of freshness. Our turnaround time post-harvest and drying period is short, in a matter of days or weeks at most, whereas for edibles and vapes, there's a longer turnaround time because we use an outside processor for the distillate.

On the automation side, depending on the brand and price point in which we sell pre-rolls—and by that, I mean, we have several different brands leading from Korova, which is our high-end brand, down to Sticks, which is a little bit more of our budget brand or a price point brand and Cabana, which is more of a lifestyle brand—so it varies also a little bit depending on that. In that, for our Sticks brand, we have pre-roll machines and both the jarring and the pre-rolls are all automated, whereas with Korova, we do some mixture of either to a pre-roll machine or hand packing, just to ensure quality. I would say the automation in the industry has made considerable strides in the last few years and the quality of the systems has risen quite dramatically. And that's across the board, whether it's with respect to jarring and pre-rolling or edibles production. A lot of edibles production is still done at the kitchen level by hand, although that also, as I mentioned, is seeing great and significant strides forward on the automation side.

Do you use any software or technology to monitor your products from start to finish?

Knuettel: We do. It varies depending on the system. We have an enterprise resource planning

(ERP) system, that is what we call seed-to-sale, and it manages the process in the grow environment through production and in the inventory into the dispensaries, the point-of-sale system and through the sale, down to the individual end user or customer. Our ERP system is end-to-end, through the entire manufacturing and growing, cultivation processing, and sale process.

Further to that, in cultivation facilities, for example, there's some pretty advanced fertigation systems, as they're called, which is a system that provides both water and nutrients. We have our own formula for the nutrient system or the fertigation system. That's all automated, depending on tests we receive back with respect to plant cycle and its development cycle.

So, the fertigation system changes the formula over the development cycle, and that's all automated out of central complex in our cultivation facilities. So, obviously, with those items, plus the automation of the backend processing, there's a fair number of systems that are either in place or going into place that are increasingly rapid clip in our industry.

Do you have any advice for newcomers to the field?

Knuettel: I have spent much of my career is early stage, high growth, somewhat chaotic industries. And because of the incredibly high growth in our space, overlaid with the regulatory environment and the relatively early stage, it's an exciting industry right now to be part of and fits well with my experience in other industries or companies. I think, frankly, that the evolution in our society, with respect to cannabis, has been dramatic. We have further to go, but the number of states that have legalized, in one way or another, has been really impressive and supportive of the overall growth.

With that said, it's exciting. It's swiftly growing. There's a cool vibe and culture to it. But it is challenging. And unlike mainstream industries, because of the regulatory environment, there are more hurdles and barriers that need to be overcome to be able to put out a successful product or a good quality product. I guess the biggest thing I could say is not to underestimate the complexity of the industry, despite what is a relatively simple and straightforward concept.

Do you have any plans to expand your reach further, perhaps into the East coast eventually?

Knuettel: I think it's certainly something we actively consider when the timing is appropriate. But I'll say it's not now. We have, as I mentioned earlier in our discussion, a very large market in which we operate that is still in its early stages. The number of dispensaries in California, for example, is approximately the same number that exist in Colorado, which is a state maybe approximately one fifth the size. So, the California market, despite having a long cultural history in cannabis, is still in fairly early stages in legal cannabis.

Since there's a highly fragmented market with relatively few or any national players, there's a long runway for us to build our operation out on the West Coast. So, our focus for the near, or medium term, is to really make, produce, and build a company that's the largest West Coast MSO out there. And then, from there, we'll see where we go, whether that's organic expansion by way of licensing, for example, in the tri-state area, which, all within the last year, all three states last year legalized for adult-use. So, it remains to be seen how we’ll tackle that, whether it be organic growth or merge with some other party. But really the focus right now for the near and medium term is out West because the opportunity is so significant.

If there is a change to the federal status, how would that impact you guys as an MSO?

Knuettel: A lot of it depends on what that change looks like. There are discussions and bills currently in Congress or recently in Congress that provide anything from safe banking, called the Safe Act, which provides access to commercial banks, which, as I mentioned earlier, would be a significant value to the industry, all the way to full legalization. And along the way, there are all kinds of aspects and considerations with respect to whether it's managed at the state or federal level, what expungement or social equity issues are included, what tax items are addressed, whether interstate commerce is allowed. Frankly, I think right now, as it tends to be the case with legislation at the federal level and, especially in cannabis, it's very murky in my mind which way legislation is going to go and at what time.

There's an omnibus bill now that was introduced by Senator Schumer last week that would fully legalize cannabis. But by all accounts, there are not enough votes in the Senate to pass it. Some of the co-sponsors are refusing to do anything less and that calls into question the previously held belief that while the full legalization wouldn't have the votes that the Senate would tip it over to the Safe Act or some sort of banking act, that's in question now with some of the senators’ comments.

I wish I had a crystal ball to be able to figure out what the legislative environment looked like around the bend, because that would have a significant impact on our strategy and our processes and operations. But, at this point, I just don't have any clear insight into it, and trying to plan for it is therefore very difficult.

Do you guys do any in-house testing for your products or is it all third party?

Knuettel: We have, before any of our products are shipped or hit the shelves, we are required to have third-party testing on various matters, whether pesticides or chemicals or anything else like that. We also do in-house testing with respect to developing new genotypes or strains in our laboratories. So, we have, I would say, two layers. We have a layer of R&D testing in-house, and then, a regulatory layer to ensure health and safety for the consumers.

Since you are multistate operators, but you obviously can't ship between states, how do you manage the product formulation? Does one group come up with product formulation and then you send a recipe out?

Knuettel: Yes, with respect to edibles, that's correct. It's formula-based, or recipe-based, and we can obviously share the recipe across states. With respect to flower and similar products, we cannot ship across state lines. So, we have essentially separate genetics testing and development in any state in which we operate.

Is there anything else you'd like to add?

Knuettel: I think it's an exciting time in our industry. My background was largely in early-stage tech across the last 20 or 25 years. I think it’s exciting to see the growth in the industry and the advancements in both operating procedures and process as well as technology and automation. In any industry, the value of technology and automation can significantly improve margins, operating profits, and operations. Our industry is one that is only recently legal in many states. The systems—whether they are ERP systems, pre-rolling machines, sorting, or any of the other aspects that are still in their earlier stages of development—it’s exciting to see the almost daily advancements in our industry, with respect to process and technology.

I think these developments are going to usher in an industry in the next five or 10 years that is really advanced, it will probably be the most advanced agriculture-based industry in the world, because some of the tech and processes coming online. Some of that's driven by the need for efficiency and profit and some of it is driven by regulatory environments. But I think if you look at some of the developments in the cannabis sector—whether they're on the medical, adult use, or pure pharma side—that there's just enormous upside potential and it's exciting to be part of and see it happening.