Grown Rogue International (OTC: GRUSF) is about to get a lot bigger.

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The Oregon-based cannabis company is moving into New York through a planned acquisition of PharmaCann's New York cannabis license and assets. And for a company that generated just $11.3 million in revenue last quarter, the assets it's targeting are anything but trivial.

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The deal would give Grown Rogue a cultivation and manufacturing facility in Hamptonburgh, New York, with approximately 24,000 square feet of indoor flower canopy and another 16,000 square feet of greenhouse flower canopy. It would also get four Verilife dispensaries, including two serving both recreational and medical customers and two currently limited to medical cannabis.

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Now, before PharmaCann significantly reduced production earlier this year, the Hamptonburgh facility was producing more than 2,000 pounds of flower per month. Meanwhile, the four dispensaries have averaged about $1.7 million to $2 million in monthly sales over the past 18 months.

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For Grown Rogue, that's a pretty substantial expansion.

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The price is surprisingly low

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Grown Rogue expects to pay approximately $4.5 million for the PharmaCann assets, subject to an inventory adjustment. Of that amount, $3 million would be paid after regulators approve the change of control.

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But the company isn't funding the entire expansion itself.

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Grown Rogue formed Grown Rogue New York, or GRNY, as a 51/49 joint venture with an outside capital partner. That partner has already contributed $10 million in exchange for a 49% preferred-equity interest and has committed to provide another $5 million through a term loan. Grown Rogue estimates the acquisition, capital expenditures, and working-capital requirements will total approximately $12 million.

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That's important because Grown Rogue isn't exactly sitting on a massive balance sheet.

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Rather than loading the parent company with the entire cost of entering New York, management is using project-level capital while retaining a controlling 51% interest.

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Why New York?

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The opportunity Grown Rogue sees in New York is pretty straightforward: lots of dispensaries and not enough high-quality indoor cannabis being grown locally.

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Chief Strategy Officer Josh Rosen pointed out that New York now has more than 700 dispensaries, while the state still has relatively limited indoor flower canopy.

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That's almost tailor-made for Grown Rogue.

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Unlike some cannabis companies that spent years trying to become vertically integrated national conglomerates, Grown Rogue has remained heavily focused on one thing: producing premium indoor flower efficiently.

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And the business has been growing.

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Q2 revenue increased 41% year over year to $11.3 million, driven by 65% growth in New Jersey, 49% growth in Michigan, and 14% growth in Oregon. Adjusted EBITDA reached $2.1 million, compared with $1.5 million a year earlier.

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Now management wants to apply essentially the same operating model to PharmaCann's existing infrastructure.

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This isn't a done deal

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To be sure, Grown Rogue hasn't completed the PharmaCann acquisition yet. The companies are still working toward definitive purchase agreements, and the transaction will require regulatory approval. In the meantime, Grown Rogue has entered consulting, lease, financing, and other agreements that allow it to begin managing the transition and help restart operations.

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So there's still execution risk.

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New York's cannabis market has had plenty of regulatory and operational problems, and turning around underutilized cultivation assets isn't necessarily easy.

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But the potential payoff is significant.

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Grown Rogue is a relatively small cannabis producer that generated $11.3 million last quarter. It's now positioning itself to control an operation with four dispensaries already generating roughly $20 million to $24 million in annualized retail sales, based on their recent monthly run rate, plus a cultivation facility capable of producing thousands of pounds of flower.

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That's not just another state expansion.

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If Grown Rogue can close the acquisition and successfully restart PharmaCann's New York operation, it could materially change the size of the company.

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