Cultivation potential leads Grown Rogue to snap up PharmaCann’s New York medical cannabis permit

When Josh Rosen, chief strategy officer of Oregon-based cannabis cultivation company Grown Rogue, considered New York as a potential next market for expansion, one factor kept cropping up.

In a state with more than 700 cannabis retailers and market growth so strong that regulators say it could overtake California, there are just a handful of licensed large-scale indoor cultivation facilities with canopy greater than 25,000 square feet.

And an even bigger one was on the market.

That supply gap is why Grown Rogue acquired flailing cannabis multistate operator PharmaCann‘s vertically integrated New York license and assets – including 40,000 square feet of cultivation canopy – in a $4.5 million cash-and-stock deal announced Friday. 

“We’ve had eyes on New York for years,” Rosen told MJBizDaily. “Of all the markets we could go to, New York was the one that’s most enticing.”

The transaction, structured through a new entity called Grown Rogue New York, gives the company:

• PharmaCann’s Hamptonburgh, N.Y.-based cultivation and manufacturing facility, with about 24,000 square feet of indoor flower canopy and 16,000 square feet of light-deprivation greenhouse canopy
• Four Verilife medical and recreational marijuana stores in Albany, Syracuse, Buffalo and in the Bronx in New York City

Why did Grown Rogue buy PharmaCann’s New York medical cannabis business?

As of March, New York’s production capacity stood at about 588,000 pounds of cannabis annually. Meeting future demand may require three times that amount, regulators have said.

“The one thing that was crystal clear was that there was a lack of indoor flower canopy,” Rosen said.

Lawmakers and regulators structured New York’s adult-use cannabis market towards small operators. Vertical integration is only permitted for microbusinesses – or for an entity that holds one of the state’s few vertically integrated medical cannabis permits, called “registered organizations” (ROs).

ROs are able to cultivate up to 100,000 square feet of canopy or more if given permission by the state Office of Cannabis Management.

Currently, there are just a handful of large-scale indoor facilities, all controlled by major marijuana MSOs, according to Rosen:

They are:

• Curaleaf Holdings
• Canopy Growth Corp. through its affiliate Acreage Holdings, which has shuttered its retail locations that operated under the Botanist brand, according to the state
• Green Thumb Industries
• Vireo Growth Corp., which announced an $88.5 million purchase of its 389,000 square foot facility in May

When the adult-use rollout began, MSOs that held the medical cannabis permits were initially excluded from adult-use participation. That dampened the incentive to invest in large-scale indoor canopy, Rosen said.

“ROs were being cut out of the market,” Rosen said.

Rather than focus on retail, Grown Rogue’s strategy in New York is to be a wholesale provider to existing retailers, Rosen said.

How is the deal structured?

Grown Rogue financed the acquisition through a joint venture that keeps the company in control while shifting most of the upfront capital risk to an outside partner.

The structure lets Grown Rogue run the business without fronting the full cost:

• The deal is a 51/49 joint venture. Grown Rogue holds 51% and operates the business. An unnamed existing shareholder came in as the capital partner, taking a 49% stake and absorbing the financial risk.
• The venture arranged up to $15 million for the acquisition. The outside partner contributed $10 million for its 49% position.
• The partner gets paid first. Preferred equity earns a priority annual distribution of $1 million in year one and $2 million each year after. Grown Rogue then collects a matching distribution as second priority, and any remaining cash flow splits 49/51 between the partner and Grown Rogue.
• Grown Rogue can buy the partner out within five years once the partner recovers its full $10 million. If that doesn’t happen, the partner can convert its stake into Grown Rogue shares at a price starting at $0.55 and stepping up over time. A full conversion at today’s price would add about 18.2 million shares, diluting existing shareholders by about 7%.

What will it take to reset operations?

PharmCann’s Hamptonburgh cultivation complex averaged more than 2,000 pounds of flower a month before production slowed early this year, according to Grown Rogue.

The company’s four retail stores have been averaging aggregate monthly sales of $1.7 million to $1 million over the past 18 months, as per the company.

But restructuring existing PharmaCann-era leases is among the biggest challenges to closing the deal.

Adjusted lease rates account for more than 80% of an anticipated $20 million in annual cost reduction, according to the company’s press release.

The company projects New York operations will turn after-tax operating cash flow positive within nine months and reach about $600,000 in monthly cash flow within 18 months, according to the press release.

But the company is betting on quality over volume.

Grown Rogue’s standard in markets like Oregon and Michigan centers on what Rosen calls the finer elements of good flower: Smokability and consistency are the markers that earn shelf credibility with independent retailers and consumers.

He expects the first harvests in Hamptonburgh may fall short of the company’s full specifications but said the capital structure is designed to provide enough runway to get there.

Are cannabis MSOs in an M&A phase?

The deal is the latest example of a competing marijuana MSO swallowing up a PharmaCann asset as cannabis industry consolidation continues.

Chicago-based PharmaCann has closed at least three cultivation facilities in recent months after defaulting on several leases in 2024.

And it’s not Grown Rogue’s first acquisition of a former PharmaCann property.

Grown Rogue is nearing its first harvest at a former PharmaCann facility in Illinois snapped up in March and is completing its renovation of a Minnesota cultivation facility it acquired in December. It’s also expanding its New Jersey facility.

At the moment, Rosen said the company has its hands full with opening new cultivation facilities in other states and is not looking to take on more.
It made an exception for the New York deal.

“For great opportunities, you don’t always get to pick the time – it’s not linear,” Rosen said.

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.