In a booming business that's under the microscope of regulators and larger potential competitors, the bigger a company can get, the better. That's the approach of cannabis cultivator and retailer Terra Tech Corp. (TRTC) , which is bulking up as quickly as possible to gain market share.
However, the Irvine, Calif.-based company is mostly focusing on internal growth instead of paying the lofty valuations that the cannabis space is currently seeing for mergers and acquisitions. "There's a lack of discipline in pricing," Terra Tech CEO Derek Peterson told Real Money. "There's a 'Green Gold Rush' mentality in certain pockets."
For example, when Terra Tech looked to buy a cannabis company earlier this year, it found two candidates with identical revenue streams - one that wanted about $9 million and the other that asked double that price.
At the same time, Canadian cannabis companies have been wading into the U.S. market looking for acquisitions, driving up prices even more, Peterson said. "It's a more challenging price environment," he said. "We don't want to spend too much out of the gate."
So, Terra Tech plans to grow its footprint from scratch instead paying inflated prices for acquisitions, Peterson said.
Growing Like a Weed
Rapid growth remains a top priority for the company.
"We're focusing on expanding our cultivation and extraction facilities, as well as our retail storefronts," Peterson said. "We're also looking at social lounges to become a destination for customers. We're looking at adding delivery services -- that's a no brainer."
Terra Tech has already grown its revenues to $36 million in 2017 from just $25 million in 2016 while working to expand its footprint of stores and cultivation facilities in its core states of California, Nevada and New Jersey. The company also grows lettuce and herbs that it wholesales to supermarkets under the "Edible Garden" brand name, using a New Jersey hydroponic operation that could someday produce cannabis instead.
Part of Terra Tech's growth has come from acquisitions, such as its 2016 purchase of Oakland, Calif., cannabis dispensary Black Oak. TRTC also operates a second California store in Santa Ana and is adding new locations from scratch in Southern California. Additionally, Terra Tech has four dispensaries In Nevada -- three in Las Vegas and one in Reno.
However, that path has challenges as well. For example, financing remains hard for cannabis companies like Terra Tech to get. Peterson said mortgage rates and equity payments are higher for cannabis properties. For instance, Terra Tech is paying 12% interest and a 45% down payment to buy two Southern California buildings.
A $200 Million Market Cap
Trading on the OTCQX, Terra Tech has built up a respectable roughly $200 million market cap. But for now, it's not planning a move to the larger Nasdaq, Peterson said.
He said that due to cannabis' illegal status at the federal level, major U.S. stock exchanges remain closed off to businesses that sell or touch the plant. For example, the Nasdaq rejected MassRoots (MSRT) in 2016, with no other cannabis companies permitted since then. However, Peterson said that Terra Tech follows the Nasdaq's regulatory protocols and is ready to list there if federal cannabis rules change.
A Big Change for a Guy from Morgan Stanley
Peterson, who formerly served as a senior vice president at Morgan Stanley (MS) and Wachovia, said running Terra Tech differs greatly from his past experiences.
"With Morgan Stanley, everything you need is a phone extension away -- accounting, legal, human resources," he said. "[But] when I started as CEO at Terra Tech in 2012, I had to jump from that into an entrepreneurial mode, where you're wearing all the hats."
Peterson said that Terra Tech has built up more of a traditional corporate structure since then, but still remains a fast-moving enterprise.
"We're overbuilding our internal teams so we can absorb any acquisitions and organic growth quickly, ramp up the business and bring new revenue in," he said. "It's an aggressive stance."
While Terra Tech has yet to turn a profit, market observers say its double-digit revenue growth places the company on more solid ground than many other cannabis businesses.
Analyst Alan J. Brochstein told Real Money that TRTC is "making progress and offers a good relative valuation when compared to other companies that cultivate, process or sell cannabis."
And a cannabis investor who spoke on condition of anonymity said the company has "expanded in a smart way, with strong leadership at the helm. Expansion of facilities in Nevada and New Jersey positions them well for sales in Nevada and expected adult-use sales in New Jersey."
Terra Tech already has about 300 employees and plans to continue hiring and looking for expansion opportunities, although mostly in California and Nevada for right now. The company could also convert its New Jersey hydroponic facility to cannabis cultivation if the Garden State legalizes recreational marijuana, as some politicians are proposing.
TRTC remains well capitalized for growth, thanks to a $40 million promissory-note deal that it signed in March with underwriter Alliance Global Partners. So, far the company has used the arrangement to sell $10 million of convertible senior promissory notes that pay 7.5% interest. Terra Tech also has another $30 million of debt available for future sale under the deal.
But like other cannabis businesses, TRTC faces heavy compliance costs and a debate on national cannabis legislation even as some individual states legalize recreational and medical use.
"There's a tremendous amount of regulatory burden in the industry," Peterson said. "That's the cost of moving from a black market to a regulated market."
(This column has been updated to include details of Terra Tech's recent debt offering.)