Watching Santa Ana, California-based Unrivaled Brands (OTCQX: UNRV) compete in this market reminds me of the movie Memento, where memoryless Guy Pearce literally experiences the action unfold along with the rest of us, even though it’s his story and he’s the only one in it living life essentially in reverse. Similarly, and this may indeed be a stretch, Unrivaled – unlike most MSOs that first set up shop in limited license states in the Midwest and East – has pinned its success on market dominance in the Western markets, including the granddaddy of them all, California. To accomplish this task, the company employs a peerless level of professionalism, according to its CEO, Frank Knuettel, who spoke recently with CBE about how his game plan is unfolding in real time, and who unflinchingly gave away the company’s not-so secret to success toward the end of our conversation.

“It all comes down to a traditional mainstream business approach to the cannabis industry that heretofore hasn’t existed.” Knuettel was in a usual state of transit as we conversed. “I live in New York, but I spend most of my time in California either at our headquarters in Santa Ana or at our various locations in SoCal, NorCal, Sacramento, and to a lesser extent, Portland, Oregon,” said the peripatetic executive, who assumed the CEO role late last year. “I haven’t stopped traveling since I took over in December 2020, so the light at the end of the first tunnel was with some of the COVID bounce backs. There have been a couple of additional tunnels, but since December, I’ve been running hard, and this month, because of the return to normalcy in the conference circuit, it’s augmenting the normal travel.”

I noted that Unrivaled’s recent history seemed like a blur of M&A for the company. “I’ll try to unblur it,” said Knuettel, “but there are definitely a couple of transactions we may need to talk through in a little more detail. The foundation of Unrivaled was with a company called Terra Tech, which was founded in 2009 to provide services and equipment to cultivation operations, so it was an ancillary business, i.e., non-plant-touching. It went public in 2012 on the OTC, took a leap of faith in 2015 by acquiring a dispensary in Oakland without seeking approval from any of the regulatory bodies, specifically SEC or FINRA, despite being public; frankly, we just prayed, filed a 10K, and received comments back from the SEC, none of which had to do with cannabis, and the company was off to the races. It raised a fair amount of capital, acquired dispensaries in NorCal, SoCal, and Nevada, and built the company up.

“Frankly,” he added, “my predecessors made a couple of big missteps, the culmination of which was various stakeholders soliciting or requiring a change in management and governance toward the end of 2020. That culminated in Nick Kovasevich – the founder, CEO, and chairman of Kushco Holdings – and another gentleman, and myself joining the Board, and my stepping in as CEO, with the mandate to restructure our balance sheet, usher out the founders, and commence rebuilding the company. So, in Q1, we collapsed the cap structure; the founders had super voting Series A, we collapsed that, and bought out all the Series A and Series B into common [shares], ushered them out in February, restructured the balance sheet, and commenced part two, which was the rebuilding.

“We’ve had a number of forward steps in that regard this year,” he added, “the first of which was the merger with Umbrla, which closed on July 1, at which point we rebranded the company as Unrivaled Brands. Terra Tech had two dispensaries and one cultivation facility in East Bay, and a couple of other projects in hibernation, so following the merger, [Unrivaled now] had two dispensaries and cultivation and NorCal, a dispensary in SoCal, and importantly, good quality brands and distribution in both Oregon and California. So, that merger tripled the size of the company on a revenue basis and brought in some quality brands, and that really was the first big step towards the rebuilding.”

Another key piece of the grand plan is the establishment of retail-based delivery throughout the state and region, a goal the company recently advanced with the purchase of a delivery company based in the California’s state capital. “We entered into an agreement to acquire Silverstreak, which is the delivery platform in Sacramento. You may have seen we announced it earlier this week, and it closed last Friday. We are using the Silverstreak platform and expanding it to our facilities in Oregon and California. We’re very much a believer that delivery as an adjunct to brick-and mortar is hugely valuable. As a standalone, it’s a tough business model, but as an adjunct we can amortize inventory, facilities, personnel, brand name, etc. We are opening Silverstreak Delivery out of our San Leandro facility later this month, and then in November in Orange County, and then in January and February in the Inland Empire and downtown L.A. at our other facilities.”

The addition of delivery is happening concurrent with another significant purchase by Unrivaled, one equally crucial to its development strategy. “Some of those other facilities came by way of the subsequent acquisition of Peoples, which brings us probably the most prominent dispensary, certainly in SoCal and maybe in California,” said Knuettel. “[Located] in Orange County on the 55, Peoples sees a very considerable amount of traffic and revenue. And then, downtown L.A. is slated to open in mid-November, Riverside in late December or early January, and there are two additional dispensaries that are in final licensing from the Peoples acquisition. We haven’t disclosed it yet, but they are also located in very prominent locations in So Cal. They need to be built out, but they have conditional use permits and properties already associated with them.

There also are the two dormant projects left over from the Terra Tech deal. “One is a cultivation facility in the East Bay that we completed and took live about a month ago,” added Knuettel. “We have plants in the ground on that one and [expect] a first harvest in late Q4. Another is a mixed-use facility in Orange County with dispensary and cultivation. We’re doing that in phases, with the dispensary slated to open in mid-February and cultivation sometime in mid-2022. That brings it to where we are from an asset and operations perspective. Going forward, we will be, as I mentioned, expanding delivery to dispensaries in the East Bay, downtown L.A., Orange County, the Inland Empire, and then, Portland. We have a big distribution facility for our brands in Oregon that is up and running. It represents a quarter to a third of our historical revenue, but [that percentage] will be smaller as we open more of these dispensaries.”

Moats and Brands

I noted that the Unrivaled website mentions a few third-party distributors the company works with, but in general it seems like the company prefers to have everything in-house. “Most of it is in-house,” replied Knuettel. “We have our own distribution network in Oregon and California, and we hit over approximately 400 dispensaries over 90 days. I don’t know how much you know about the Oregon market, but it has roughly the same number of dispensaries as California. We have our own distribution network for distribution of our own brands, and we also distribute third-party brands that are complimentary; for example, Cann, which is a beverage option. We don’t have a beverage in our owned portfolio, so we do distribute third party brands that are complimentary to ours or fill in slots. So, we control the proverbial seed-to-sale; we have indoor cultivation for our premium Korova brand, and brands and distribution and retail and delivery.

“And that’s part of our overall strategy, which is that we are very focused on building up our operations in California and Oregon, which represent about 30 percent of the national market,” he added. “We have two of what I call moats around the business; one, we have federal illegality, so we’re not competing against the Philip Morris’s, RJRs, and Anheuser Busches of the world, but also the large multistate operators in our industry, which tend to focus on the Midwest and East Coast limited license states. There will come an intersection point at some time, whether it’s 2022 or ‘23 or ‘24, when there is going to be an increased focus on the California and Oregon markets, and our goal is to become the preeminent player in these markets so that when that happens, we have a good foundation to compete or, frankly, represent a good partner. I don’t know how that story is going to play out, but our goal is to become the preeminent player in California and Oregon at a time when there is a little lower level of competition in the space.

“I will add that there is a pretty quick rolling up of dispensary assets in California, and I think by this time next year there will be a half dozen companies that control 60, 70, or 80 percent of the [retail] volume,” he said. “Harborside acquired Urbn Leaf in San Diego, we acquired Peoples’ parent company, so you can see it’s already happening, and I think by virtue of our acquisition of People’s on top of the footprint we already have, I’m quite comfortable that we’re going to be in one of those half dozen, and I’m quite comfortable we’re going to be on the winning side of the aggregation based on our existing footprint and the acquisitions we’ve made a date. I don’t think it’s dependent on making additional acquisitions, but at the same time, we are interested in filling out geographies where we don’t have much of a footprint and yet, whether it’s San Diego or San Jose or the Central Valley around the Modesto, Sacramento area.”

Like most people who know the region, Knuettel still sees massive upside in California. “Going back to my comment that Oregon has roughly the same number of dispensaries as California, I’ll also say that Colorado has roughly the same number of dispensaries as California, so if you look at it on a per capita basis, California is under-penetrated,” he said. “And there are definitely movements towards legalization taking place in California, where it’s state legal but there is a lot of deference to municipalities. In Orange County, for example, Santa Ana has been the only municipal game in town, but that is changing. Costa Mesa has legalized [cannabis sales] and the rules are being rolled out. There will be a dispensary there starting in eight to 10 months, when the first one will open, and then there will be others. Huntington beach is looking at it; Anaheim is looking at it, so definitely more municipalities have begun to adopt a legalization process. I expect that some of these cities and towns will be legalizing as they run their own processes, and we are staying firmly afoot in those places for when the processes arise.”

I remarked that there appeared to a reluctance on the part of most large MSOs to enter California without having some perceived advantage, but it seemed more likely that it would be Kneuttel’s years of experience out West that would serve him well over time.

“If I can provide two comments,” he replied, “I think, very much like the Broadway perspective, that if you can make it as an artist in New York, you can make it anywhere. And likewise, if you develop a good business in California, you can make it anywhere, and one of the things that I’ve experienced is that because a lot of the MSOs are in limited license states, they don’t have to be as good, and because they don’t have to be as efficient, they don’t have to be as sharp, so I think testing our mettle out here provides us with a much better operating blueprint to go into other states when the time is right.

“With respect to the California market and large MSOs,” he added, “as I indicated before, we’re going through a period of considerable retail consolidation, and for a large MSO that doesn’t have a footprint or very limited footprint here to try to go roll up three or five dispensaries here, one or two dispensaries there, three or five somewhere else, boy, that’s hard. But I think when we get to this point next year, and five or six companies control 70 or 80 percent of [retail] volume, that will be the time when they start thinking more seriously, because they can enter a very large market with one bite. I don’t know if that will transpire next year or the year after, and we’re really looking to build a good company in the meantime, but I do strategically envision long-term that there will come a point when the MSOs realize that they can enter the market through a single acquisition and have a meaningful footprint here rather than trying to enter a competitive market while it’s still going through that process, because you’re never sure who the winners or losers are going to be. But I think by this time next year it’ll be much more apparent who the winners and losers are going to be, and as I mentioned, I’m very comfortable we’re on the winning side.”

As far as brand strategy goes, Unrivaled possesses three main brands in its portfolio. “We have Korova, which is our premium indoor; Cabana, which is our boutique lifestyle [brand], and Sticks, which is our value brand,” said Knuettel. Of the three, Korova clearly has the deepest brand penetration, but the company is leaving nothing to chance. “I think the long-term value creator for any company in our space is the brand, and we look at building the brand, because while Korova is a great brand, it’s still a pretty fragmented market,’ said Knuettel. “We look at building the brand by virtue of controlling the distribution, and as I indicated, we already touch 400 doors every rolling 90 days, but also through [controlling] shelf space and menu space, and by concentrating on the rollout of our dispensaries and delivery, where we are controlling access to more consumers. I think a big part of brand creation or strengthening in California is the control of the mechanism of delivery to the consumer, whether it be retail or delivery. So, for us long-term, it’s brand value; short- and medium-term, it’s supporting the growth of that brand by supporting and controlling the delivery of touch points.”

As far as moving into other states, Knuettel said the company will bide its time. “We’re focused on the West Coast, and because it is such a large market and is in a period of consolidation right now, we have enormous work that we can do and growth we can do in these two states,” he said. “So, for the short- and medium-term, meaning the next 18 months, our focus will be very firmly on the states. We also license Korova in Arizona and Oklahoma, and we are looking to expand that footprint, – it’s the highest priority of the company – and it is something we are looking to invest in as we continue to build out our brand support and presence on the West Coast.”

As a West Coast producer of indoor flower, I asked Knuettel about the survival of small farms, which are having a tough time as prices crater. “Yes, at the moment, indoor prices, especially for good indoor, are very solid. Sun-grown prices right now are under pressure, especially up in Humboldt and Santa Barbara counties, which are the two largest sun-grown areas. And so, outdoor sun-grown is definitely under pressure right now, and there’s going to be a bit of a shakeout. It probably will take a year or more to reach a new equilibrium. We have certainly worked with a select number of farms, and I think they and we are going to be fine, but for some of the other cost-marginal farms or farms connected with marginal brands, I think they’ll have greater difficulty over the next year or so.”

I mentioned I was told that there had been discussions about regional legal states – California, Oregon, and Washington, for instance – creating their own market if allowed. “It’s possible,” said Knuettel. “One of my benchmarks coming into the industry in 2018 was that – while it was federally illegal – there were too many states that had employment and tax revenue from their statewide legal cannabis for the federal government ever roll it back, and that while trying to handicap legislation at the federal or state level is difficult, I think that is a really overarching theme to how this might all play out. And by that, I mean, if you are Washington state and you’ve got a tax basis and employment basis cultivating, do you really want to do a deal with California? If you do a deal with California, the Emerald Triangle and Santa Barbara counties, that’s the mother ship of outdoor cannabis. And if you roll it to federal legislation and how that might evolve, if you’re Colorado and you get $50 or $100 million a year in tax revenue from indoor cultivation, do you really want California cannabis in your market?

“You might want California brands,” he added, “but California brands using Colorado grown products!” That, of course, raised the question of quality control in a highly regulated industry where rules vary state to state, hardly a recipe for consistency by any company.

“With that said,” replied Knuettel, “with Cabana, Korova, and Sticks, we have a brand manager, and they are individually responsible for the quality that goes into the product to make sure it’s comparable, and that gets back to another thing in the industry that has not been historically well considered, and that is quality control. I mean, before I got involved, we didn’t have a brand manager, and there was no one who woke up every day who was focused solely on fulfilling that brand’s mission, whether for Sticks, the value brand, or for Korova, our high-quality indoor brand. And it’s pervasive in the industry where because the focus on [quality control] was not there, a brand’s quality would be haphazard even within a single state. Again, that’s part of the professionalization [of the industry] and the process that we’re bringing to bear here, which is a traditional brand management perspective that focuses on quality control, a marketing approach, and margins. That really has been lacking in the industry and it’s led to haphazard quality and marketing, and frankly, brands come and go. A part of our perspective is control of delivery and shelf space, but part of it also is creating a consistent product to the consumer that’s been lacking in broad strokes across the industry before now.”

Filling in the Holes

I ask what specifically differentiates Unrivaled from its competitors, aware that everything that has been said has spoken to that, but I still want the elevator pitch. “I think we’ve been touching on that throughout the course of our discussion, but it all comes down to a traditional mainstream business approach to the cannabis industry that heretofore hasn’t existed,” he replied. “We’re bringing professional-grade management to an unbelievably strong platform to expand the scope of our footprint throughout the state. It’s really pretty elemental: professional management, good platform, good brands in a state with slightly lower competition than from large, well-capitalized folks in other states. That’s doesn’t mean [Unrivaled] is not competitive. We are publicly listed, we have 200,000 shareholders, and there’s been a movement from private to public companies in the capital market. So, when you roll it all up together, I think we have the recipe for success in these markets.”

I asked Knuettel about recent statements from the company projecting revenue in excess of $70 million in 2021, and that the company will be cash-flow positive in Q4 of this year. I also asked if the company was currently looking to acquire more assets.

“Those numbers are still relevant, although I think because of some of our expansion, cash flow might actually be pushed to Q1 of ‘22, but that our expansion also brings with it an amount of revenue that’s going to approximately double in 2022, so I think that’s also a strong component,” he said. “As far as being in acquiring mode, we’re taking a bit of a breather. Between the merger and the two acquisitions, plus the dormant assets we had when I took over, in the next four or five months we will be opening dispensaries in downtown LA, Riverside, and Santa Ana. We also just opened a new cultivation in NorCal, we’re opening another cultivation site in SoCal, and we’re expanding the delivery. We’ve got a really good team, but we can only do so much, and I really do want to spend the next two or three months making sure we get everything operational and on a good track. But we are keeping our eye out and do intend after the New Year to turn to filling in those holes in San Jose, San Diego, the Central Valley, Modesto, Sacramento area, and potentially a brand or two that complement our existing brands. We don’t really have a sun-grown brand, for example, so we will look at that at some point. So, that’s the game plan, but the next two or three months are very operational and then we’ll turn to filling in the holes.”

As far as new products on the horizon, Unrivaled will be introducing a high-quality Korova gummy, said Knuettel, who added that the decision has been made to dispense with the Blüm dispensary brand at some point. “We’re actually going to sunset that [name],” he said. “Peoples will be the [brand name for the] more prominent dispensaries, and we’re going to do Silverstreak as the junior dispensaries that have delivery depots attached to them.”

I asked which Unrivaled brand names Knuettel wants consumers to have in their head. “Unrivaled Brands is the corporate name,” he said. “For the consumer, it’s going to be Peoples, and it’s going to be Korova, Cabana, Sticks, and Silverstreak; those are the brands that are going to resonate with consumers.”